Abstract Through wage and income tax, municipalities participate in Germany’s most important source of tax revenues. The standards for the allocation and distribution of tax revenues are of great fiscal and distributional significance. This paper highlights reform options and the consequences of a cross-state system variation in the income tax distribution. It discusses exemplary options for the federal government to strengthen municipal financial autonomy and the associated regional effects, which result in greater harmonisation and stabilisation of municipalities’ fiscal capacity. At the same time, the high equalisation intensity in Germany’s federal financial equalisation systems, which sometimes results in a prohibitively high transfer withdrawal rate, can be illustrated.
Frankenberg et al. (Thu,) studied this question.
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