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uni'wissen 01-2014_ENG

Prof. Dr. Lars P. Feld has served as professor of economic policy and constitu- tional economics at the Uni- versity of Freiburg since 2010 and is the director of the Walter Eucken Institute. He studied economics at the Uni- versity of Saarland. After earning his doctorate and habilitation at the University of St. Gall, Switzerland, he worked as professor of economics in Marburg and Heidelberg. Feld has been a member of the scientific advisory board of the German Federal Ministry of Finance since 2003, and he was appointed as an expert to the commission of the Bundestag and Bundesrat on the mod- ernization of the financial re- lations between the federal and state governments in 2007. He has been a member of the German Expert Council for the Assessment of Macro- economic Development since 2011. His research interests include economic policy, public finance, new political economy, and economic analysis of law. Photo: private Further Reading Burret, H. T. / Feld, L. P. / Köhler, E. A. (2014): Panel cointegration tests on the fiscal sustainability of German states. Discussion paper, University of Freiburg and Walter Eucken Institute. Burret, H. T. / Feld, L. P. / Köhler, E. A. (2014): The fiscal sustainability of German states (Laender): Time series evidence. Discussion paper, University of Freiburg and Walter Eucken Institute. Burret, H. T. / Feld, L. P. / Köhler, E. A. (2013): Sustainability of public debt in Germany – historical considerations and time series evidence. In: Jahrbücher für Nationalökonomie und Statistik / Journal of Economics and Statistics 233/3, pp. 291–335 trifle.” The joint taxes, which are allocated to the federal, state, and municipal governments, make up about three-fourths of the states’ revenue. They are set by the two houses of the federal government, the Bundestag and the Bundesrat, the latter of which is composed of members of the state governments. Thus, the states do have a say but are not allowed to deviate from decisions made by the entire parliament. The joint taxes include payroll and income tax, 42.5 percent of which goes to the state governments, and corpo- rate income tax, which is split up evenly between the federal government and the states. “My proposal is for the states to first raise part of their revenue from these taxes themselves with the help of a surtax and then continue to receive the rest from a common source,” explains Feld. A gentle introduction to the model would ease the planning process and ensure that the tax rates – and therefore the revenue – do not drift too far apart from the outset. The part of the revenue the states are responsible for raising could be increased with time, stiffening the competition by degrees. In addition, this system would also be compatible with a financial equalization scheme. This scheme could not be based on the tax rev- enue of the states, however, because that would defeat the whole purpose of the competition. Rather, the goal would be to level out differences in the initial conditions of the states by way of an equalization of resources. If the GDP per capita is less in one state than in another, the basis in the former for raising taxes will also be lower. An equalization of resources could counteract this inequality, regardless of how high the tax rates and the revenue in the individual states actually are in the end. Hence, instead of harmonizing the results, it would provide for equal opportunity and thus fair competition. In this way, it would still be possible for a poor state to generate more revenue with the help of a high tax rate than a rich state with a low rate – while at the same time receiving equalization payments. But what would happen if the states all try to outdo each other in the competition for low tax rates because they want to be attractive places to do business and live – so much so that they can no longer fulfill their public responsibilities and endanger the welfare state? Such fears set the tone of the discussion in Germany. Feld, on the other hand, again points to Switzerland, as with the debt brake. For him Switzerland is both a model and an object of research. He observes that the tax competition there is intense and very effective. “The Swiss cantons are always coming up with new ideas on how to gain the upper hand. Even as early as the 19th century there are won- derful episodes in which, for instance, Basel- Land complains about Zurich.” The government thus needs to continually adjust the scope for fair competition. But apart from isolated mistakes, says Feld, Switzerland profits from the competition between the cantons, because these mistakes will be corrected on election day at the latest: “State governments with fiscal autonomy have a greater obligation to account for their actions to the citizens.” Gigantic deficit: The Federal Republic of Germany has amassed over 2,000 million euros in debt. But the key factor is not the amount of debt but the rate at which it is growing. Photo: Atelier W/Fotolia 15