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Germany Seeks End To Fiscal Equalization

by Ulrika Lomas, Tax-News.com, Brussels

25 October 2012


Marking a significant turning point, financial experts of Germany’s Christian Democratic Union (CDU) party have united on plans to reform the country’s controversial system of fiscal equalization, notably by granting individual federal states the fiscal autonomy to determine their own levels of income tax.

The aim is to end the increasingly untenable situation, whereby Germany’s four richest federal states, namely Bavaria, Baden-Württemberg, Hessen and Hamburg, finance poorer states, notably the city-state of Berlin, which currently receives transfers of around EUR3bn (USD3.9bn).

Anchored in the country’s constitution, the system of fiscal equalization among the sixteen federal states in Germany, or “Länderfinanzausgleich”, is designed to ensure that individuals in all German states have uniformity of living standards, even if, for example, the labour market and tax receipts are weaker in some regions.

Resentful of having to so heavily subsidize other regions, Germany’s so-called “donor states” have threatened to submit an appeal challenging the system to Germany’s Federal Constitutional Court in Karlsruhe.

The CDU proposals, which have the backing of the German finance ministry and Finance Minister Wolfgang Schäuble, may remove the need for intervention from Germany’s highest court, however, especially given that the plans have received unanimous support among states across Germany.

The key proposal would allow greater tax competition among debt-ridden federal states, finally able to temporarily determine their own rates of income tax. The aim would be to give recipient states clear incentives to improve their revenue collection, while at the same time ensuring that donor states are no longer penalized for pursuing a successful fiscal policy leading to increased tax revenue.

TAGS: individuals | court | Finance | tax | tax incentives | fiscal policy | law | tax rates | Germany | tax reform | individual income tax

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