Reform of the Business Tax in Germany

In this paper the fiscal problems of local authorities in Germany are outlined with particular reference to recent reforms of the business tax and with special emphasis on the larger cities. The decline of tax revenue from autonomous sources is shown to undermine severely the freedom of actions of local authorities. Criteria for a good finance system, from a local authority perspective, are outlined. It is concluded that (1) renovation of the business tax is essential to increase those components which are not related to business profits, (2) inclusion of transfer payments in the assessment of the income tax base is necessary. Reform might include reinstatement of the payroll tax.