Tax talk Counting the Cost

Germany's chief auditor wants the government and the country's 16 states to stop bickering over tax revenues and collaborate more to improve efficiencies.
Kay Scheller was active in politics before becoming Germany's chief auditor.


Kay Scheller has been president of Germany’s Federal Audit Office since last year. The agency, which is based in Bonn, western Germany, is tasked with examining the government’s financial management, monitoring its property and business portfolio and auditing its budget. It is “free to roam” and not subordinate to any branch of government, parliament or the judiciary.

Before he took up the post, Mr. Scheller worked as a senior aid to Volker Kauder, the parliamentary leader of the ruling Christian Democrats and a man often referred to as Chancellor Angela Merkel’s right-hand man.

Here, Mr. Scheller talks about his plans for the Audit Office. These focus on the federal government’s relationship with Germany’s 16 states, which raise their own taxes but also receive funds from the federal government. The states are keen for more autonomy, and many Germans are critical of the inefficiencies created under the current system, which is under review.

Mr. Scheller, it is your job to audit the government’s budgetary management. Why are you now interested in rearranging the financial relationships between the federal government and the states?

It is always a risk for the government’s budget when it puts funds at the disposal of the states, where efficient use of capital cannot be guaranteed. That is why I am advocating against overlap wherever possible. The impending reform of the financial relationship between the federal government and the states would be a good opportunity for it.

Could you be more specific?

Today, the federal government already shoulders considerably greater debt burdens than the states and municipalities. In spite of that, it has continually tightened its belt for the benefit of the states. Examples are the payment of family benefits, the financing of child-care centers, a student loan program and the assumption of municipal benefits.

But in negotiations, states are requesting that the federal government hand over revenues from the solidarity tax, imposed on all Germans to help eastern Germany rebuild following reunification.

I take a very critical view of that. Without something to compensate for the revenues from the solidarity tax surcharge, it would be difficult for the federal government to propose a budget without new debts beyond the current financial planning period.

How do you want to change the system whereby the federal government pays states for every major reform?

Basically, those that make the funds available should also be responsible for their efficient use. Technical and financial responsibility should be held in one hand.

Although the states are responsible today for collecting taxes, they certainly lack interest in going about it meticulously, since they must pass on a major portion of the revenues to the federal government and other states. Tax enforcement should be carried out according to uniform federal standards, but I see serious deficiencies here.

At the moment, for example, the state of Brandenburg, which surrounds Berlin, is only allowed to keep €8 ($9) for itself from every €100 ($113) of income tax collected. How would you change that?

Politicians must decide about the reorganization of state revenue sharing. But it is clear that the figure you cite is not much of an incentive for states to do all they can to collect taxes. This can be seen, for example, in the great regional differences in the frequency of tax audits.

The debate over the reform of the financial relationships between the federal government and the states is primarily about tax revenues. Shouldn’t expenditures also be under consideration?

Yes, absolutely. A major concern of mine is the unbundling of the relationships between the federal and state governments. I am thinking here of the basic benefits for job seekers, or the field of education, in which both levels of government are involved, and above all, financing of road construction.

How can the investments in transport, which the federal government wants to increase, be more efficiently organized?

Take the federal highways, where it would be easy to reduce overlap. The federal government should concentrate on the freeways and make sufficient funds available to the states so they can take care of the federal highways in the future. Experience has shown that bad planning occurs less frequently when it’s your own money you’re budgeting.

However, a decision by the federal government that states get X amount more billions while assuming responsibility for a task certainly doesn’t do the job. How should the tax revenues be divided among the individual states? At the moment, it seems financially strong states are getting stronger and the weak are getting weaker.

States are responsible for organizing a fair redistribution. When financial strength drifts apart, it would be logical to redistribute more rather than less. The federal government also supports the redistribution, the revenue sharing, with considerable funds through its supplementary federal grants. The solidarity tax is key here.

Worries are growing that the euro crisis could return because of Greece. If a euro member becomes insolvent, it could cost Germany.

The crisis mechanisms have worked. The euro crisis is defused. Other alternatives would probably have been much too expensive, but it is true that one should not lose track of Germany’s European obligations and the inherent risks they present to a sustainable federal budget.


Donata Riedel writes about economic policy for Handelsblatt, Axel Schrinner reports on tax and finance policy. To contact the authors: [email protected], [email protected]