The constitutional provisions relating to the Federal Republic of Germany's finances are found in Articles 104a to 108 of the Basic Law (Grundgesetz/GG). These regulate financial autonomy across the Federation and the federal states (Länder), as well as the financial relationships between the Federation, Länder and municipalities, the apportionment of expenditures, the distribution of powers regarding tax laws, tax revenue, financial administration and financial jurisdiction. As with other parts of the Basic Law, the constitutional provisions on federal finances have been amended over the years and adapted to account for developments. For example, a "debt brake" was incorporated as part of what is often referred to as Federal Reform II. The debt brake aims restrict new debt taken on by the Federation and the Länder and put budgetary developments on a more sustainable footing long term. It was suspended in response to the Covid-19 pandemic.
Tax revenues in 2018 totalled €776.3 bn. These are derived from:
In addition to these federal, Land and municipal tax revenues, social services are funded from revenues from mandatory insurance contributions for employees (statutory health insurance [2018: approx. €230bn], statutory pension insurance [2018: approx. €230bn], statutory unemployment insurance [2018: approx. €40bn] and long-term care insurance [2018: approx. €50bn]), and administrative fees and user charges (especially at municipal level).
In 2018 the Federation's share of total tax revenues was 41.5% and of total VAT revenues just under 50%. The Federation's share has declined slightly over the last decade in favour of the Länder and local authorities.
The total revenues of the local authorities in 2018 was €253.9bn, of which €71.4bn was from own taxes. Around €50bn of this was spent on child and youth services.
VAT and consumption taxes are the tax forms with the broadest tax base, making up almost half of all tax revenues. These revenues place a disproportionately high burden on lower-income and younger households, since the bulk of their income goes on consumer spending.
Income tax accounts for just under one-third of tax revenues. Income tax is based on a progressive taxation system to ensure it is oriented to the individual or family based on their income bracket. Lower-income households pay very little or no income tax.