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Unformatted text preview: ond limits: not only has fiscal capacity per capita been totally evened
out (at a level of 99.5 percent of the national average after federal “gap-filling” grants); when taking all federal grants into
account, the variations among states would amplify again.22
While interjurisdictional solidarity through equalization certainly facilitates consensus in an intergovernmental framework,
this is not without political and economic costs. The redistributive process among states and among the federation and
lower tiers of government breaks the link that should exist between expenditure decisions and their financing. This
reduces the accountability of policy makers and it diminishes the influence citizen-voters can exert onto politicians.
Moreover, the states lose any interest in developing their own tax bases, for instance through more effective tax 21
22 This graph is based on own calculations derived from data supplied by the Ministry of Finance (Finanzbericht).
The Federal Constitutional Court has also criticized this high degree of equalization, but it has recognized, in its ruling of 1999, the 95-percent mark—
obtained after the redistribution of stage two—to conform with the constitution. 47 Commission on Fiscal Imbalance administration or better economic policies.23 In a formal sense, interregional solidarity tends to reduce the financial
autonomy of states even further —which is severely curtailed by the constitution anyway. This jeopardizes the
independence of their budgeting, and hence policies. Moreover, equalization arrangements putting high penalties on any
excess fiscal capacity relative to the national mean tend to encourage inefficient budget behavior, especially if combined
with a federal grants scheme that effectively bails out non-performing governments.
FIGURE 6 The analysis of the implicit marginal burden inherent in the combined system of interstate equalization poses the
question, how much of a fictitious increment of own revenues of a state will ultimately remain at the disposition of that
state; conversely, what the implicit marginal burden on incremental own revenue would be. If a state is guaranteed a
minimum, and if that state’s resources fall below that minimum, any increment of own resources is virtually “taxed” or
diverted through the system of equalization. This explains the lack of interest of such states in developing their own tax
base. Figure 6 indicates the high degree of implicit marginal burden on own taxes inherent in the German system of
A further aspect of the system is related to potential moral hazard by state authorities. A grants system that takes actual
revenue and expenditures into account favors irresponsible budget behavior. If the community through the principle of
intergovernmental solidarity almost automatically carries budget deficits, there is no incentive whatsoever to avoid such
deficits. On the contrary: A country can spend more than corresponds to its original fiscal capacity, knowing, or confiding
in, that the community of states or the federal government will ultimately bail it out. Although it is difficult to prove such
behavior in practice, it is true that the Finanzausgleich and the federal grants „soften“ any hard budget...
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