Introduction
The political and fiscal system in Germany is characterised by a federal structure, which means that power is divided between the central federal government (Bund) and the governments of the federal states (Länder).
However, this structure is reflected not only in political competences, but also in the financial and tax system.
So what is the difference between the revenue sources of the federal government and those of the state governments?
In this article, we present a detailed and well-structured comparison that explains how each level is financed and what the differences are in terms of taxes, revenues and financial transfers.
First: An overview of the German fiscal system
The fiscal system in Germany consists of three levels:
the federal government (Bund)
the state governments (Länder)
the municipalities (Kommunen)
Revenue is distributed among these levels according to specific rules set out in the German Basic Law (Grundgesetz). These rules are designed to ensure efficiency, balance and fairness between the different regions.
Revenue sources of the federal government (Bund)
The federal government relies on several main revenue sources, the most important of which are:
1. Its share of joint taxes
income tax (Einkommensteuer)
corporate tax (Körperschaftsteuer)
value added tax (Mehrwertsteuer)
→ These taxes are divided between the Bund, the Länder and the municipalities according to fixed percentages.
2. Taxes assigned exclusively to the federal level
Consumption taxes such as:
tobacco tax
energy tax
alcohol tax
→ These taxes flow directly into the federal budget.
3. Non-tax revenues
profits from state-owned enterprises (such as the railways and the postal service)
federal fees (for example passport fees)
fines and penalties
proceeds from the sale of federal assets
4. Public borrowing
→ Used to cover budget deficits, but subject to strict rules under the “debt brake” (Schuldenbremse).
Revenue sources of the state governments (Länder)
The revenues of the Länder, on the other hand, are made up of somewhat different components:
1. Their share of joint taxes
The same three main taxes:
income tax
corporate tax
value added tax
→ The states receive specified shares, calculated on the basis of population and tax capacity.
2. Taxes specific to the Länder
real estate transfer tax (Grunderwerbsteuer)
inheritance and gift tax (Erbschaftsteuer)
taxes on casinos and games of chance
→ These taxes go directly into the budgets of the Länder.
3. Financial transfers (Länderfinanzausgleich)
transfers from the federal government to compensate economically weaker states
solidarity-based transfers from richer states to states with lower tax revenues
4. Non-tax revenues
tuition and fees from public universities
income from state-owned property at the regional level
returns on public investments
administrative and service fees (such as vehicle registration or court fees)
The fundamental difference between the revenues of the federal government and those of the states
| Aspect of comparison | Federal government (Bund) | State governments (Länder) |
|---|---|---|
| Supervising legal authority | Federal Ministry of Finance | Ministry of Finance of each individual state |
| Main types of taxes | Focus on consumption taxes and joint taxes | Reliance on joint taxes and some taxes specific to the Länder |
| Exclusive own taxes | Tobacco, alcohol, energy taxes and customs duties | Real estate transfer tax, inheritance tax, gambling taxes |
| Financial transfers | Pays transfers to the states and does not receive transfers | Receives transfers from the federal government or from richer states |
| Borrowing | Permitted under strict rules laid down by the debt brake | Permitted within the constitutional limits of each state |
| Main areas of expenditure | Armed forces, external security, foreign affairs, pensions | Education, internal security, transport, culture, health |
Why is this division important?
This financial separation aims to:
ensure the autonomy of the Länder in managing their educational, cultural and social affairs;
achieve financial balance between richer and poorer states through a national solidarity mechanism;
distribute financial responsibility in a way that promotes efficiency in public spending and limits excessive centralisation.
Conclusion
Although the federal government and the state governments in Germany share some revenue sources, each has its own fiscal system that reflects its autonomy and different fields of responsibility.
Understanding this distinction is essential for understanding the nature of the German political system and the way public resources are managed within a carefully balanced federal framework.
* The writing and editorial team of the website strives to provide accurate information based on thorough research and consultation of multiple sources. Nevertheless, errors may occur or information may be presented that is not entirely verified. For this reason, the information in these articles should be regarded as an initial point of reference, and you should always consult the competent authorities for definitive and binding information.
