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Unformatted text preview: stribution of the corporation tax requires a formula
apportionment of income for firms with multiple regional activities (Zerlegungsgesetz), and the assignment of personal income taxes according to
residence favors residential areas over production sites—which could be critical for municipalities and city states.
It should be noted, however, that the federal government was partially compensated by higher federal taxes (in particular on mineral oil) and by a
federal “solidarity” surcharge on the income tax.
At present (2000), the federation is entitled to an initial deduction of 5.63 percent of VAT in compensation for supplementary contributions to the
national pension system. The municipalities are participating in the sharing of VAT since 1998 (article 106 section 5a GG). Their entitlement is 2.2
percent prior to the sharing of VAT among the federation and the states.
State taxes are defined in paragraph 7 (1) Finanzausgleichsgesetz. 41 Commission on Fiscal Imbalance The implicit redistribution effects of VAT sharing are often underestimated. When considering only the new states of the
East (without Berlin), their tax potential was only 43.8 percent of the national average per capita before VAT distribution,
but reached a level of 84.6 percent of the national average after VAT revenues had been included.15 It implies that these
Eastern states acquire roughly twice as much VAT revenues per capita than their Western counterparts. The
redistributive effects of VAT sharing among states are illustrated in figure 1.16
FIGURE 1 At a second level, there is the Finanzausgleich scheme, a redistribution of resources among the states. Such a scheme
is logical for a situation where there are no vertical fiscal imbalances. If such imbalances did exist—as in Australia in
favor of the Commonwealth, or in the EU in favor of the member states—, regional equalization schemes would typically
be implemented in the form of vertically asymmetrical per capita grants (downwards in Australia, upwards in the EU). In
the absence of such vertical imbalance, however, regional equalization must be arranged horizontally among the
participating states (see figure 2). Germany is unique in having created such a system, which is, of course, based on a
federal law reigning the mechanics of the scheme with uniform rules. 15
16 42 State taxes as in footnote 14—benchmark for compensation through supplementary VAT transfers—do not comprise VAT itself. This is why the share
including VAT will remain below the yardstick of 92 percent mentioned before.
Source: BverfG (1999). Commission on Fiscal Imbalance FIGURE 2 Whatever approach is taken, there must be clear procedures and firm criteria that govern equalization. At the
international level, interregional equalization schemes have adopted varying philosophies.
♦ In the United States, for instance, an explicit regional redistribution program is nonexistent, but there are implicit
equalization effects resulting, for instance, fr...
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