The German model of addressing vertical and horizontal fiscal imbalances

The German federation possesses three levels of government: the federation, the states and local governments. Each level of government is autonomous as to their expenditures of the budget, and administrative responsibilities for financing each respective outlay function are linked – with some exceptions. However, lower tiers of government possess practically no significant own taxes – except for some local taxes. Tax legislation is uniform throughout the nation. In matters of taxation the states can only co-decide conjointly with the federal parliament (Bundestag) through their second chamber (Bundesrat) whose members are not elected but representatives of state governments. Although the German equalization system is under continuous political stress and is criticized as being overly generous, with negative incentive effects, it is unlikely to change significantly given the institutional setup where the majority of states are at the receiving end of the scheme. The pending reform of 2020 has brought about only marginal changes.