Census results of great significance: numbers of inhabitants - Part 5: Equalisation of revenue in Germany

Numbers of inhabitants are not only used to allocate seats and votes in various bodies, they often serve as a basis for distributing public funds – for example when it comes to the fiscal equalisation among the Länder.

In Germany there are of four stages in the fiscal equalisation process. First, tax revenue is distributed vertically between the Federation and the Länder. Stage two is the horizontal distribution among the Länder and stage three the “fiscal equalisation” among financially stronger and financially weaker Länder. At the last stage, supplementary federal grants are given to underperforming Länder. A good overview of the individual stages is provided by the following article on the website of the Federal Ministry of Finance.

Two examples will show how important the official number of inhabitants is for fiscal equalisation calculations.

Example 1: Horizontal distribution of the Länder’s share in turnover tax revenue

Nearly half of the revenue from turnover tax is distributed among the Länder. The number of inhabitants plays an important part in this horizontal distribution. Up to 25 % of the Länder’s share in turnover tax revenue is given to them as a “supplementary share”. To this end, a Land’s tax revenue per inhabitant is related to all Länder’s average tax revenue per inhabitant. The remaining share of the turnover tax revenue to which the Länder are entitled, that is at least 75 %, is distributed among the Länder in accordance with their numbers of inhabitants.

Example 2: Fiscal equalisation among the Länder

Fiscal equalisation among the Länder is to balance differences in the financial capacity of the individual Länder. Here the number of inhabitants plays a central role, too, as the starting point of fiscal equalisation among the Länder is the financial capacity per inhabitant of the individual Länder.

For compensation purposes, a calculation is made for each financially weak Land in order to determine by how much its financial capacity per inhabitant is below the average financial capacity per inhabitant. Accordingly, a calculation is made for financially strong Länder to see by what amount their financial capacity per inhabitant exceeds the average financial capacity per inhabitant. The compensatory amounts are set on the basis of these computations.

In addition to the above examples, the communal equalisation scheme determines the municipalities’ share in the tax revenue of a Land and its redistribution among the municipalities. The number of inhabitants comes to bear in this equalisation scheme, too. As the communal equalisation schemes of the Länder differ considerably, we cannot dwell on the subject here.