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Fiscal federalism in Germany: Stabilization and redistribution before and after unification

  • Hepp, Ralf
  • von Hagen, Jürgen

We provide empirical estimates of the risk-sharing and redistributive properties of the German federal from 1970 until 2006, with special attention to the effects of German fiscal system base unification. We find that tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (Länderfinanzausgleich) together reduce differences in per-capita state incomes by 36.9 percent during period 1970 to 1994. After the full integration of East German states into the mechanism in 1995, the redistributive effects increase slightly to about 38.6 percent. With respect to the insurance effect of the German fiscal system, our results indicate that the federal fiscal system offsets 47 percent of an asymmetric shock to state per-capita incomes. This effect has significantly decreased after the inclusion of the East German states in 1995. Furthermore, we find that the German fiscal system provides almost perfect insurance for state government budgets against asymmetric revenue shocks; also, its redistributive effect with regard to the tax resources available to state governments is very strong.

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Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 01-2009.

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Date of creation: 2009
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Handle: RePEc:zbw:zeiwps:b012009
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  12. Asdrubali, Pierfederico & Sorensen, Bent E & Yosha, Oved, 1996. "Channels of Interstate Risk Sharing: United States 1963-1990," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1081-1110, November.
  13. Hans Pitlik, 2004. "Zur Politischen Rationalitaet der Finanzausgleichsreform in Deutschland," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 239/2004, Department of Economics, University of Hohenheim, Germany.
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  15. Robin Boadway, 2003. "The Theory and Practice of Equalization," Working Papers 1016, Queen's University, Department of Economics.
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  17. Melitz, Jacques & Zumer, Frédéric, 1998. "Regional Redistribution and Stabilization by the Centre in Canada, France, the United Kingdom and the United States: New Estimates Based on Panel Data Econometrics," CEPR Discussion Papers 1829, C.E.P.R. Discussion Papers.
  18. Andrew Atkeson & Tamim Bayoumi, 1993. "Do private capital markets insure regional risk? Evidence from the United States and Europe," Open Economies Review, Springer, vol. 4(3), pages 303-324, September.
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  23. Robin Boadway & Anwar Shah, 2007. "Intergovernmental Fiscal Transfers : Principles and Practice," World Bank Publications, The World Bank, number 7171, June.
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