Abstract
We provide estimates of the risk-sharing and redistributive properties of the German federal fiscal system based on data from 1970 to 2006, with special attention to the effects of German unification. Tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (Landerfinanzausgleich) together reduce differences in per-capita state incomes by almost 40 percent. 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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