Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/145695
Year of Publication: 
2016
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Fiscal Policy No. E08-V1
Publisher: 
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft, Kiel und Hamburg
Abstract: 
The provisions of the German financial equalization system (Länderfinanzausgleich), a specific form of a fiscal union among the federal states (Länder), will expire in 2019. In this paper, we assess the effects of the system as well as of reform proposals on key macroeconomic variables and welfare by means of a two-region general equilibrium model. We find that, on the one hand, as expected, abolishing tax revenue equalization would favor transfer paying states in terms of GDP and consumption, and significantly hurt receiving states. Furthermore, households living in the financially strong states would benefit from higher wages and more leisure. This induces migration towards these states. On the other hand, on aggregate, the average German household's welfare would be negatively affected, even though those who live in the paying states would gain. However, the negative macroeconomic effects involved by the abolition of the equalization transfers might potentially be countervailed by the concomitant reduction in disincentive effects for the budgetary policy.
JEL: 
H70
H77
E12
Document Type: 
Conference Paper

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