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Federal Fiscal Equalization System Before Reform: An Inventory

Press Release of July 9, 2014

One of the key tasks of this legislative period is to restructure the federal fiscal equalization system by 2020. There is a lot of money involved: in 2013, nearly 14 percent of ultimate tax revenue from the Länder was redistributed. The existing system has developed over time, is highly complex and convoluted. Thus, there is a high demand for modifications and fundamental adjustments would be desirable. However, it is likely that political agreement will only be reached on partial changes to the existing system. Ultimately, negotiations are likely to be dominated by the issue who gets or pays how much. Obviously the volume of fiscal transfers is essentially driven by the high degree of equalization concerning the fiscal power of the Länder. But there are also other drivers that are of high relevance. It is not yet finally decided which tax revenue should be included or how the number of inhabitants should be taken into account. Finally, supplementary grants will be a task under consideration. In general, any intervention to the system will leave winners and losers behind. Thus, in this report, exemplary changes to the system will be evaluated and quantified. In view of the political process the current uneven distribution of profits and losses among the Länder is a challenge. While Bavaria can expect high gains, Berlin, the two other city-states and the new Länder will lose out. High concentration of gains and losses among individual Länder is from a political point of view difficult to accept. If no fundamental reform can be worked out, though some form of modification is regarded necessary, the Bund will have to decide on the degree of his engagement. This is not a good solution, rather adjustments regarding the distribution of tax revenue should be considered.

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