Financing the federal system
in The Länder and German federalism

According to the official English translation of Article 20, para. 1, of the Basic Law, the Federal Republic of Germany is a ‘democratic and social federal state’. A better translation might be ‘a democratic and federal social welfare state’. ‘Social’ in German usually means socially fair, or just, and generally equal. Therefore, this concept provides a constitutional basis for the German welfare state. How to secure and preserve a highly developed social welfare state with a variety of public services available to all citizens and simultaneously maintain a functioning federal system with autonomous Länder is a question Germans have had to wrestle with since the Basic Law went into effect in 1949. This chapter focuses on the financing of the German federal system and discusses the issue of taxes in the drafting of the Basic Law, the finance reforms of 1955 and 1969, basic principles of German fiscal federalism, fiscal equalisation within the Länder, German unification and the Solidarity Pact of 1993, other federal grants to the Länder and the issue of Länder consolidation.

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