Competitive Versus Cooperative Federalism: Is a Fiscal Equalization Scheme Necessary from an Allocation Point of View?
With its great financial reform in 1969 the Federal Republic of Germany pushed through a model of cooperative federalism. One of ist central elements is the fiscal equalization scheme between the states in the federation. After the German reunifaction there was a shift in science as well as in the political sphere from this model to one of competitive federalism. From the point of view of efficiency, there have since been calls for the elimination of fiscal equalization, in particular. The models from which this conclusion is drawn are extremely restrictive. It will be shown that it is the distribution of land ownership that decides whether a fiscal equalization scheme is necessary if governments have unrestricted access to land rent taxation. Moreover, it will be shown that replacing a tax on rents accruing to the immobile factor of production, land, by a tax on the mobile factor of production, labor, leads to efficiency as well, if a fiscal equalization scheme is established. These results are derived by linking the question of the necessity of a fiscal equalization scheme to the question of the efficient provision of public inputs.
Volume (Year): 225 (2005)
Issue (Month): 3 (May)
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