Reform der Gemeindefinanzen

The paper contributes to the discussion about the reform of local finances in Germany. This discussion is centered around the local business tax, which displays severe shortcomings. Somewhat surprisingly, local governments have so far rejected proposals for reform. The paper shows that this can be explained by the role of municipal fiscal equalization which tends to protect local governments from some of the major problems of local business taxation, i.e. revenue fluctuations and tax competition. A substitution of the business tax by a local income tax as recently proposed would require a substantial reform of the fiscal equalization system which implies many uncertainties and risks. As a reasonable alternative the paper suggests to improve the land tax.