Fiscal Capacity and Determining Structural Characteristics of the Eastern German Laender

East Germany exhibit low tax revenues per capita of only about 50 % of the German average. A study of the Dresden Branch of the Ifo Institute, commissioned by the Saxon State Ministry of Finance and the Thuringian Ministry of Finance, examines the sources of the disproportionately low fiscal capacity of the East German states. The authors show three different channels which cause lower tax revenues in East Germany. These are the deadlock GDP gap to the West German economy, federal tax law (tax progression, childcare allowance) and different rules in the breakdown of total tax revenue and GDP to the states. The authors conclude that the main sources of the disproportionately low fiscal capacity of East Germany cannot be addressed by the state level. This may justify fiscal transfers to East Germany even in future times.