Fiscal Federalism and Political Decentralization

Fiscal Federalism and Political Decentralization

Lessons from Spain, Germany and Canada

Studies in Fiscal Federalism and State–local Finance series

Edited by Núria Bosch and José M. Durán

This book analyzes political decentralization and fiscal federalism in Canada and Germany, both traditional federal countries, and in Spain, a unitarian country engaged in the last two decades in a process of decentralization. Three key issues required for a well designed financing system are analyzed in depth, namely: tax assignment, equalization grants – i.e. redistribution of money from the wealthy regions or the national government to poorer regions, and the role of local governments in the administration of taxes.

Chapter 6: Fiscal Equalization in Germany

Thiess Buettner

Subjects: economics and finance, political economy, public finance, politics and public policy, political economy, public policy


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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