The principles of parallel development of fiscal capacity between state and municipalities as useful benchmarks for the determination of the inter-governmental grants in Germany

The conventional theoretical and empirical references related to the inter-governmental fiscal transfer system in Germany appear to heavily concentrate on the issues surrounding the measurement of local expenditure needs of a municipality and their coverage through the down-flow grants when the municipal tax revenue is insufficient to match the needs. This study introduces additional important research fields in this context. Firstly, it attempts to analyse the role of the development of tax revenue and fiscal power of the grant provider (the State) as well as the joint financial relationship between the State and (different types of rural and urban) municipalities in the determination of inter-governmental grants. Secondly, when the total volume of the State grants is determined, this study examines in the next step under the particular consideration of different tax capacities in varied categories of municipalities, how this amount should be horizontally distributed among these groups to achieve the equal growth of hypothetical per capita fiscal capacity.