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Unformatted text preview: es of states. It means that parts of the federal grants that are now
accorded post Finanzausgleich would have to be accounted for prior to horizontal equalization.31
If it were possible to define a “standardized deficit” for each state, which would correspond to its number of population
multiplied by the sum of standardized expenditures minus standardized revenue plus specific grants and cofinancing
means from the federal government, this would establish a „neutral“ and fair basis for the horizontal equalization.
„Neutral“ means in this context that no receiving jurisdiction has an incentive to neglect its own revenue potential, nor to
manipulate its budget, for instance by increasing its expenditures in regard of implicit or explicit bail-out provisions
inherent in the system.
How far interregional solidarity should go is a matter of political choice. The Constitutional Court has sanctioned a
leveling off of 95 percent of the national average as conforming to the constitution, but has expressed qualms as to
further compensations that go beyond that target. This should suffice to guide politicians in reviewing the law. Moreover,
the population criterion mandated by the constitution as the guiding principle for interregional equalization could then be
employed without further corrections at the subsequent level of horizontal Finanzausgleich, where „special burdens“—
that would now have been taken care of by specific federal grants at an earlier stage—would no longer play any role. In
practice, it would relieve the states from compensating „special burdens“ within the mechanism of interregional
The amount to which the financially stronger states would be asked to contribute to interregional solidarity will depend on
the implicit “tax rate” that mirrors the compensation rate depicted in figure 3. Public finance experts have typically
expressed the view that this schedule should be linear—rather than highly progressive as is the case now. The rationale
for this is mainly to avoid abrupt upsurges of marginal fiscal increments or siphoning-off rates. What the slope of this
schedule could be is, again, a matter of political choice.
To this point, the reform reflections of this paper are based on a personal interpretation of the rulings by the
Constitutional Court. They should hence conform to the Grundgesetz. However, more competitive elements may easily
be introduced and reconciled with this approach although they would imply a constitutional amendment. Competitive
elements could enhance subsidiarity and hence strengthen local and regional administrations both politically and
economically without jeopardizing interregional solidarity. I think in particular of the right of states to levy some own
taxes. An autonomous tax policy—at least “at the margin”—is an essential and constituent element of state sovereignty.
It strengthens the accountability of politicians and bureaucrats vis-à-vis their citizens, and thus contributes to render
state budget policies more responsive, effective and efficient.
Own taxing rights could simply be introduced in analogy to t...
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