Tax and Policy Drivers of Personal Overindebtedness in the European Union

This paper evaluates drivers of personal overindebtedness in the European Union. Overindebtedness gives rise to poverty, social exclusion, and other serious social problems. However, the European Union has not adopted a common definition of overindebtedness. This paper explores whether tax policy, indicators of economic freedom, and macroeconomic traits such as the debt to gross domestic product ratio can explain private indebtedness. Sparsity-inducing regression methods applied to data from 27 European Union countries from 2013 to 2020 isolated two predictors that reduce household debt and two predictors that increase it. The level of social contributions and the overall tax burden are associated with lower private debt. Financial freedom and the ratio of public debt to gross domestic product elevate private debt. These are the only four predictive variables among 17 to attain statistical significance under all four regression methods deployed in this study. Future research should expand the methodological toolkit and examine additional demographic factors such as sex and education.