Lessons from Spain, Germany and Canada
Studies in Fiscal Federalism and State–local Finance series
Edited by Núria Bosch and José M. Durán
Chapter 6: Fiscal Equalization in Germany
1 Thiess Buettner INTRODUCTION While revenue-sharing and ﬁscal equalization are a common characteristic of sub-national government ﬁnances in many countries of the world there is a particular emphasis on this element in Germany. To some extent this is related to German history: Germany for a long time displayed a large, loosely connected group of small countries. While the German empire established in 1871 still displayed a large degree of autonomy, the two World Wars resulted in severe ﬁscal pressures that led to a substantial degree of formal cooperation on the revenue side of the budget, which bears elements of centralization. While the Federal Republic still displays a non-trivial vertical structure of the public sector, the close cooperation on the revenue side results in extensive use of revenue-sharing and ﬁscal equalization among governments. In order to provide some background, the following section starts with a brief overview of sub-national government ﬁnances in Germany. Afterwards, the chapter devotes attention to the local level and discusses revenue-sharing and ﬁscal equalization between local municipalities. This will allows us to reach a basic understanding of the basic motivation of ﬁscal equalization. Section 4 will then discuss ﬁscal equalization at state level. Section 5 concludes with some remarks on the German system of ﬁscal equalization. 2 FISCAL DECENTRALIZATION IN GERMANY The three-tier structure of the public sector in Germany involves a system of vertical and horizontal ﬁscal equalization. Figure 6.1 provides a graphical representation where the dashed arrows depict horizontal equalization. The straight lines represent elements...
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