Preliminary and Incomplete. Please Do Not Cite.

We provide empirical estimates of the risk-sharing and redistributive properties of fiscal equalization among the states of the German federation. Fiscal equalization serves the dual role of insuring regional income against asymmetric revenue shocks (i.e., short-run income differences), and decreasing long-run differences by redistributing tax revenues among states. In our empirical study, we evaluate the performance of the German fiscal system between 1970 and 2006. We find that tax revenue sharing and the fiscal equalization mechanism (Länderfinanzausgleich) together lead to a redistribution of 36.9 percent of state income, with a contribution of 5.5 percent by the Länderfinanzausgleich, for the period 1970 to 1994. After the full integration of East German states into the mechanism in 1995, redistributive effects drop to about 35 percent. The contribution of the Länderfinanzausgleich increases significantly – to 14 percent – for this period. With respect to the insurance effect of the German fiscal system, our results indicate that this effect has dramatically increased after the inclusion of th