CONTINUEThis site uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Find out more.
  1. Front Page
  2. News By Topic
  3. Germany Seeks End To Fiscal Equalization

Germany Seeks End To Fiscal Equalization

by Ulrika Lomas,, 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

To see today's news, click here.


Tax-News Reviews

Cyprus Review

A review and forecast of Cyprus's international business, legal and investment climate.

Visit Cyprus Review »

Malta Review

A review and forecast of Malta's international business, legal and investment climate.

Visit Malta Review »

Jersey Review

A review and forecast of Jersey's international business, legal and investment climate.

Visit Jersey Review »

Budget Review

A review of the latest budget news and government financial statements from around the world.

Visit Budget Review »

Stay Updated

Please enter your email address to join the mailing list. View previous newsletters.

By subscribing to our newsletter service, you agree to our Terms and Conditions and Privacy Policy.

To manage your mailing list preferences, please click here »