Mobility

Fiscal Federalism In Germany: Stabilization And Redistribution Before And After Unification

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Executive Summary

The author provides empirical estimates of the risk-sharing and redistributive properties of the German federal fiscal system based on data from 1970 until 2006, with special attention to the effects of German unification. It's found that tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (L?nderfinanzausgleich) 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, the results indicate that the federal fiscal system offsets 47 percent of an asymmetric shock to state per-capita incomes.

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