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A germany without fiscal transfers

A Germany without fiscal transfers

Germany shifts an enormous amount of fiscal transfers across jurisdictions each year. This column argues that limits the amount of economic disparities across regions, but comes at the price of lower national productivity and output. Still, with regards to welfare, Germany wouldn’t normally be better off if all fiscal transfers were abolished.

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Many countries conduct policies that shift tax revenue across regions so as to tackle spatial economic disparities of their territory (e.g. Acconcia et al.2015). Fiscal transfers are particularly pronounced in Germany. Using data on generated taxes and available public funds at the neighborhood level, in a fresh paper we estimate a substantial overall amount of €65.7 billion was shifted over the 411 districts (Landkreise) in the entire year 2010 alone (Henkel et al.2018). That is equal to 12.4% of aggregate tax revenue and includes various grants from upper- to lower-level government layers, the horizontal fiscal equalisation scheme across Federal States (Länderfinanzausgleich), and extra lower-tier schemes that redistribute from rich to poor jurisdictions within States. The quantity of fiscal transfers within Germany is, thus, a lot more than doubly large as all EU structural funds combined.