Chapter 3 mainly includes the following aspects:

Tax and Spending: This paragraph analyzes two key aspects of fiscal policy, namely tax and
spending. Taxes are mainly levied by all levels of government, including income taxes, corporate
taxes, and other taxes. Significant portions of spending include social policy spending, education
and defense spending.

Germany's tax structure: The paragraph details Germany's complex tax structure, which includes
a variety of taxes, such as personal income tax, corporate tax, and other aspects of taxation.
Personal income tax accounts for one-third of total tax revenue and is the main source of tax
revenue in Germany.

Personal income tax and Corporate tax: This paragraph discusses the personal income tax and
corporate tax systems in Germany. In different years, Germany has carried out tax reform many
times, including adjusting the initial tax rate and marginal tax rate.

Tax reform: Special emphasis is placed on the important tax reform of 1990. This reform includes
reducing the initial and marginal tax rates and raising the tax threshold to reduce the tax burden
on taxpayers.

Corporate Taxation: The passage discusses corporate taxation, with a particular focus on trade
taxes. In the context of European Integration (EC 1993), the German government undertook a
major reform of corporate taxation and focused on the impact of taxation on businesses of
different sizes.
Understanding of German tax policy and reform

Germany's tax system is diversified, including individual income tax, corporate tax, value-added
tax and other taxes. Among them, individual income tax and social insurance contributions are
the main components of German tax. In recent years, the German government has carried out a
series of tax reforms aimed at reducing the tax burden on middle-income groups.

In the tax reform of 1990, the German government adopted a series of measures, including
reducing the personal income tax rate and increasing the tax allowance. This reform is aimed at
reducing the tax pressure on the middle class, especially those with middle incomes. This policy
changed the income tax structure and reduced the tax burden on middle-income earners.

The tax distribution in Germany shows that personal income tax and social insurance
contributions account for a significant portion of the country's total tax revenue. These taxes
have had a significant impact on people's disposable income, especially for the working and
middle income groups. Increases in taxes and social insurance contributions have led to a
reduction in people's disposable income, which has had an impact on their standard of living.

Tax policy is closely related to social policy. Tax policy is not just a fiscal tool; it also affects social
equity and well-being. Policy initiatives such as the adjustment of income tax allowances and
family tax benefits reflect the Government's social policy objectives in the area of taxation.

In general, tax policy and reform in Germany is an important policy issue. The issue of taxation is
not only related to national finance, but also to social equity and individual living standards. The
evolution of the tax system and policy reforms have had a profound impact on German society
and the economy. Understanding these changes in tax policy is crucial to understanding
Germany's fiscal and social policy system.

In Germany, the allocation of tax revenue is an important fiscal issue, as there is competition to
deal not only with competing demands for spending, but also among the three levels of
government (the federal, federal states, and local governments) to secure a share of the revenue
collected. The problem of tax distribution in Germany goes to the core of fiscal policy, which is
mentioned in Chapter 1 and Chapter 2. The 1949 "interim" statute, based on the 1922 model,
was eventually replaced by the constitutionally guaranteed model of income distribution.
Although the federal government remains the largest recipient of tax revenue in absolute terms,
its share of this arrangement has declined.

Prior to 1980, revenue from the employee income tax and the assessed income tax was divided
between the federal government and the federal state government at 43 percent each, and the
local government at 14 percent. After the wage-calculation element of the trade tax was
eliminated in 1980, the ratio became 42.5:42.5:15, but the federal government and the federal
states each received a 7% share of the trade tax. Since 1970, revenue from corporate and
investment income taxes has been divided equally between the federal and state governments.
Although value added tax and import sales tax were also shared between the federal and federal
states, the federal government's share gradually declined from 70% in 1970 to 65% in 1986. To
help the federal states meet the transfer to the East, the 1993 Solidarity Compact stipulated that
their share of VAT revenue should be increased. As a result, the federal government's share fell to
58 percent of total revenue. In addition, the federal government redistributes a certain
percentage of its share to federal states with weaker financial conditions. Since 1987, this
equates to 2 percent of its share of business tax revenue. European Community (EC) payments
from this tax revenue are also deducted from the federal government's share. The European
Community also receives a share of customs revenue.

As a result, even before unification, the federal government's share of total tax revenue was
already declining. In 1970, that share was 53 percent of total tax revenue; By 1989, it had fallen
to 45.9%. At the time of unification, the western federal states with weaker financial positions
faced the daunting prospect of becoming net contributors to the income distribution mechanism
and the eastern Federal States receiving an equal share of VAT revenue. The Unification Treaty
envisaged the gradual introduction of VAT distribution in the new federal states, starting with
55% at the time of unification but eventually achieving equal distribution in 1995. The serious
financial situation of the eastern region led to the implementation of the equal distribution of
VAT in 1991. Despite the contribution of the western federal states to the German Unification
Fund, the question of the eastern participation in tax distribution arrangements remains
unresolved. This forced the federal government to take proactive measures: in 1991, about 25%
of the federal budget of about DM 410 billion was spent on harmonization costs. This includes a
wide range of spending, including investment incentives, infrastructure improvements, financial
assistance to state and local governments in the eastern Federal region, and job creation.

In addition to the shared tax revenue, each level of government imposes a number of specialized
taxes. For example, the federal government (as the largest recipient of tax revenue) enjoys
exclusive tax powers from taxes on mineral oil, tobacco, insurance, and spirits. In 1991 oil taxes
were raised 14 times; The diesel tax has been raised ten times. In 1991, to contribute to the
uniform costs, an average 25% increase in mineral oil tax was introduced as part of the fixed
federal tax code. It is important to note that there are considerable differences between
unleaded and leaded gasoline and between gasoline and diesel. However, the tax systems of the
various federal states are not identical, although they all levy taxes on cars, property and beer; In
addition, there is an inheritance tax. The most important source of tax revenue for local
governments is trade taxes, which account for 7% of total tax revenue. This tax has a significant
impact on the total tax revenue of local governments and is in fact an important pillar of local
fiscal autonomy, but it is also the biggest problem plaguing German businesses.

Overall, tax distribution and tax reform in Germany is an important policy issue. The tax issue is
not only related to national finance, but also related to social equity and personal living
standards. Understanding these changes in tax policy is crucial to understanding Germany's fiscal
and social policy system. Government tax policies and reforms affect the fiscal position of the
country, as well as the financial decisions of individuals and businesses. As such, this is a complex
and important policy area that requires in-depth study and analysis.
This passage provides a detailed overview of the evolution of fiscal policy in Germany from the
post-World War II era through the period of German reunification in the early 1990s. It discusses
significant changes in fiscal policy, including shifts from Keynesian demand management to more
supply-side-oriented approaches, as well as various measures and reforms undertaken to manage
economic challenges.

Post-WWII Period:

The 'Grand Coalition' of Christian and social democrats worked on balancing the budget by
pruning public expenditure and raising revenue.
Efforts to balance the budget coincided with the first post-war recession in 1967, leading to an
economic U-turn.
Transition to Keynesian Demand Management (1967):

In 1967, fiscal policy was formally assigned a role for stabilization and counter-cyclical
intervention.
An Act to Promote Economic Stability and Growth (StWG) was enacted, introducing a 'magic
square' of macroeconomic policy goals.
Constitutional Amendments and Budgetary Reforms:

Amendments to Article 109 allowed the Federal and Länder governments to maintain an anti-
cyclical reserve fund.
The Budgetary Principles Act (HGrG) required cooperation between the Federal government and
Länder in fiscal policy implementation.
The federal authorities needed consent from both houses of the Federal parliament for Article
109 measures.
A constitutional amendment to Article 115 allowed deficit spending under specific circumstances.
Institutional Changes:

The StWG established a Business Cycle Council and the HGrG created a Finance Planning Council.
The councils were responsible for making annual and five-year joint budgetary plans.
A Concerted Action Council, involving government, employers, and trade unions, was also set up
but later broke down in 1976.
Various other institutions and academic advisers provided economic analyses and
recommendations.
Policy Shifts and Challenges (1970s and 1980s):
describes the transition from Keynesian demand management to supply-side policies during the
1970s.
Economic challenges, including foreign competition, inflation, and unemployment, led to a shift
in economic policies.
suggests that the balance between fiscal and monetary policies was a subject of debate.
Shift to Supply-Side Policies under Kohl:

Chancellor Kohl's government introduced supply-side-oriented policies, emphasizing fiscal

consolidation, tax reforms, and deregulation.
Unification and Fiscal Policy:

The costs of German reunification in the early 1990s created fiscal challenges.
Various tax increases and reforms, such as VAT increases and the solidarity pact, were introduced
to finance unification.
Opposition and Critiques:

Opposition and critiques of fiscal policy measures, such as VAT increases, were discussed,
especially regarding inflationary impacts.
Complex Compromises:

Fiscal policy measures, including tax surcharges and other funding methods, were negotiated and
agreed upon to finance the costs of reunification.
The relationship between the European Central Bank (ECB) and the German Bundesbank
(Bundesbank) involves cooperation between the national central banks in the euro area and the
ECB. The ECB is the central bank of the eurozone and is responsible for managing the euro's
monetary policy. Every eurozone member's central bank is a member of the ECB, and the
relationship between them and the ECB forms the core of the European monetary system.

The following are the main ways of relations and

cooperation between the ECB and the Bundesbank:

European Central Bank (ECB) : The ECB is the central bank of the eurozone, responsible for setting
monetary policy, managing the euro money supply, maintaining price stability, and regulating the
banking system. ECB headquarters in Frankfurt, Germany.

Bundesbank: The Bundesbank is the central bank of Germany, responsible for domestic monetary
policy and financial regulation. Although Germany has joined the eurozone, the Bundesbank
continues to play an important role as Germany's central bank.

National Central banks within the Euro Area: The central bank of each eurozone member country
is a member of the ECB and together they form part of the European system. These national
central banks maintain their independence but work with the ECB to set monetary policy and
manage the euro money supply.

ECB's monetary policy decisions: The ECB's monetary policy decisions are made jointly by the
members of the ECB's Executive Board, which is usually composed of national central bank
governors. The Bundesbank plays an important role in the ECB's monetary policymaking process,
and because Germany is one of the largest economies in the euro area, its voice carries weight
with the ECB.

German monetary policy views: The Bundesbank's monetary policy views are usually focused on
soundness and inflation control. This view also carries some weight within the ECB, but final
monetary-policy decisions are decided by a vote of the ECB's board members.

Cooperation and coordination: There is close cooperation and coordination between the ECB and
national central banks. They meet regularly to discuss issues such as monetary policy, financial
stability and financial regulation. The Bundesbank, in cooperation with the ECB, ensures the
stable functioning of monetary policy and the financial system within the euro area.
The cooperation between the European Central Bank (ECB) and the German Bundesbank can be
illustrated by the following concrete examples:
European Monetary Policy making: The ECB's monetary policy is set through the ECB Executive
Board, which includes the senior management of the ECB and usually also the governors of
national central banks. As one of the largest economies in the euro zone, Germany's Bundesbank
president usually plays an important role in this process. They participate in decisions, such as
setting benchmark interest rates and quantitative easing, to ensure they are in line with the
eurozone's overall economic needs.

Exchange rate policy: The ECB is concerned with the exchange rate stability and foreign exchange
policy of the euro, which directly affects exports and international trade. The Bundesbank, in
cooperation with the ECB, may take certain actions in the international money markets in order
to ensure the stability of the euro. For example, if the euro is deemed too strong, action may be
taken to prevent its appreciation in order to preserve the competitiveness of exports.

Financial regulation and surveillance: Cooperation between the ECB and the national central
banks of the euro area to safeguard financial stability. They regularly share information on the
financial system and coordinate regulatory measures to ensure the safety of the banking system
in the euro area and prevent financial crises. The Bundesbank works together with the ECB to
ensure the health and stability of German banks in order to safeguard the stability of the
domestic and international financial system.

Remittance and Clearing: The ECB's systems support cross-border payments and the clearing of
funds. The Bundesbank, through the ECB system, participates in the clearing of funds within the
euro area and across borders to ensure that funds can move quickly and safely internationally.

These are some concrete examples of cooperation between the ECB and the Bundesbank,
working together to ensure the stability of monetary policy in the euro area, the safety of the
financial system and the protection of the euro's international standing. These cooperative efforts
contribute to the overall economic and financial stability of the euro area.