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Fiscal federalism in Germany: Stabilization and redistribution before and after unification

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  • Hepp, Ralf
  • von Hagen, Jürgen

Abstract

We provide empirical estimates of the risk-sharing and redistributive properties of the German federal fiscal system based on data from 1970 until 2006, with special attention to the effects of German unification. We find that tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (Länderfinanzausgleich) together reduce differences in per-capita state incomes by 37 percent during period 1970 to 1994. After the full integration of East German states into the mechanism in 1995, the redistributive effects increase slightly to about 39 percent. With respect to the insurance effect of the German fiscal system, our results indicate that the federal fiscal system offsets 47 percent of an asymmetric shock to state per-capita incomes. This effect has significantly decreased after the inclusion of the East German states in 1995. Furthermore, we find that the German fiscal system provides almost perfect insurance for state government budgets against asymmetric revenue shocks; also, its redistributive effect with regard to the tax resources available to state governments is very strong.

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  • Hepp, Ralf & von Hagen, Jürgen, 2010. "Fiscal federalism in Germany: Stabilization and redistribution before and after unification," ZEI Working Papers B 02-2010, University of Bonn, ZEI - Center for European Integration Studies.
    • Handle: RePEc:zbw:zeiwps:b022010
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    2. Santiago Lago-Peñas & Albino Prada & Alberto Vaquero, 2015. "On the size and determinants of inter-regional redistribution in European countries over the period 1995–2009," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(4), pages 845-864, November.
    3. Jurgen von Hagen, 2016. "Fiscal Federalism: Public Goods, Transfers, and Common Pools," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 10(2), pages 41-75, December.
    4. Ralf Hepp & Jürgen von Hagen, 2013. "Interstate risk sharing in Germany: 1970--2006," Oxford Economic Papers, Oxford University Press, vol. 65(1), pages 1-24, January.
    5. Claudia M. Buch, 2013. "From the Stability Pact to ESM - What Next?," Chapters, in: Andreas Dombret & Otto Lucius (ed.), Stability of the Financial System, chapter 5, Edward Elgar Publishing.
    6. Heinemann, Friedrich & Janeba, Eckhard & Moessinger, Marc-Daniel & Schröder, Christoph, 2013. "Revenue autonomy preference in German state parliaments," ZEW Discussion Papers 13-090, ZEW - Leibniz Centre for European Economic Research.
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    8. Yongzheng Liu, 2014. "Does competition for capital discipline governments? The role of fiscal equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 345-374, June.
    9. Bozhechkova, A. & Mamedov, A. & Sinelnikov-Murylev, S. & Turuntseva, M., 2018. "Stabilization Properties of Federal Fiscal Transfers to Russian Regions," Journal of the New Economic Association, New Economic Association, vol. 40(4), pages 61-83.
    10. Masayoshi Hayashi, 2012. "Channels of Stabilization in a System of Local Public Health Insurance: The Case of the National Health Insurance in Japan," CIRJE F-Series CIRJE-F-847, CIRJE, Faculty of Economics, University of Tokyo.
    11. Etienne Farvaque & Florence Huart, 2017. "A policymaker’s guide to a Euro area stabilization fund," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(1), pages 11-30, April.
    12. Feld, Lars P. & Schaltegger, Christoph A. & Studerus, Janine, 2018. "Regional risk sharing and redistribution: The role of fiscal mechanisms in Switzerland," Freiburg Discussion Papers on Constitutional Economics 18/02, Walter Eucken Institut e.V..
    13. Bremer, Björn & Di Carlo, Donato & Wansleben, Leon, 2021. "The constrained politics of local public investments under cooperative federalism," MPIfG Discussion Paper 21/4, Max Planck Institute for the Study of Societies.
    14. Virkola, Tuomo, 2014. "Fiscal Federalism in Four Federal Countries," ETLA Reports 38, The Research Institute of the Finnish Economy.
    15. Masayoshi Hayashi, 2013. "On the Decomposition of Regional Stabilization and Redistribution," CIRJE F-Series CIRJE-F-910, CIRJE, Faculty of Economics, University of Tokyo.
    16. Falilou Fall & Debra Bloch & Jean-Marc Fournier & Peter Hoeller, 2015. "Prudent debt targets and fiscal frameworks," OECD Economic Policy Papers 15, OECD Publishing.
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    19. Luca Rossi, 2021. "Revisiting the Case for a Fiscal Union: the Federal Fiscal Channel of Downside-Risk Sharing in the United States," Temi di discussione (Economic working papers) 1351, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Regional Risk-sharing; Fiscal Federalism; Monetary Union;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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