Joseph A. Schumpeter, Finanzausgleich (I–II) (1927)

Schumpeter’s two-part article examines the distribution of fiscal powers among the German Reich, Länder, and municipalities. Part I moves from the history of German fiscal centralization to a political account of municipal autonomy; Part II proposes revenue instruments for cities and Länder. Its central claim is that fiscal equalization cannot be reduced to transfers covering subordinate governments’ deficits. Wherever a political community retains independent purposes and control over expenditure, it needs responsibility for raising revenue. Financial arrangements must accommodate political life, not merely balance administrative accounts.

The historical opening presents Weimar’s financial constitution as a reversal of the Reich’s earlier weakness. Before 1918, prosperous constituent states coexisted with an inadequately financed central government. The postwar settlement concentrated fiscal authority so thoroughly that the imbalance changed direction. Schumpeter interprets subsequent concessions—including larger transfers and the Reich’s assumption of unemployment support—not as a restoration of autonomy but as means of preserving central control. They relieve financial distress while withholding the independent authority that Länder and municipalities actually seek.

His decisive conceptual move is to replace legal sovereignty with effective political vitality. Municipalities and constituent states belong to the same analytical problem whenever local interests acquire an independent will, represented by politicians distinct from those governing the centre.

Wo immer diese Voraussetzungen gegeben sind, nützt praktisch keine noch so schön formulierte Souveränität.

English translation: Wherever these conditions are present, even the most elegantly formulated sovereignty is of no practical use.

The question is therefore how competing political bodies can draw upon one economic base with minimal friction and an appropriate distribution of responsibility. Germany’s particular difficulty combines sweeping central fiscal competence, unsettled administrative responsibilities, and a politically weak central government. Legal concentration does not guarantee effective discipline: without the power to control subordinate expenditure, the centre remains vulnerable to demands for additional transfers.

For cities, Schumpeter distinguishes compulsory tasks from discretionary purposes. Centrally imposed obligations should be financed through transfers or grants; independently chosen activities require locally controlled revenue. Municipal politicians want neither simply to have their deficits covered nor to surrender functions. Their demand expresses the vitality of urban culture. Sound finance requires expenditure decisions and responsibility for their costs to rest on the same shoulders.

This argument leads to a striking defence of unequal local taxation. Different communities should be able to choose different combinations of services and burdens. Low-tax jurisdictions provide comparisons and restrain fiscal excess; uniform taxation could instead conceal a cartel among municipalities.

Was vielen Leuten als erstrebenswertes Ziel erscheint, Gleichheit der Belastung durch die Gemeinden, das ist gerade die – und gar nicht leicht – zu vermeidende Gefahr.

English translation: What appears to many people as a desirable goal, equality of the tax burden imposed by municipalities, is precisely the danger to be avoided—and avoiding it is by no means easy.

Autonomy nevertheless depends on institutional design. Schumpeter rejects municipal income-tax surcharges because steep progression makes increases politically attractive without sufficiently organized resistance. Conversely, accusations of municipal extravagance do not establish a general case against local freedom. Urban cultural expenditure, social policy, and municipal enterprise express durable political commitments. Fiscal policy must channel these forces rather than attempt to extinguish them.

Part II translates this diagnosis into proposals explicitly framed within the existing tax system. Municipal revenue must protect Reich finances, yield enough to ease budgetary strain and unsound borrowing, and offer a choice among sources. Autonomy need not mean separate tax codes or amateur legislative experimentation.

Vielmehr kann die Gesetzgebung darüber, abgesehen vom Steuersatz, Reichssache bleiben, worin sich auch jenes Maß von finanzpolitischer Erziehung ausleben kann, das die Zentralstellen offenbar für nötig halten.

English translation: Rather, legislation on the matter, apart from the tax rate, can remain a Reich responsibility, allowing scope also for that degree of fiscal education which the central authorities evidently consider necessary.

Schumpeter’s principal municipal instrument is a genuine tax on actual or imputed rental income, replacing existing property and house-rent taxes and their earmarking. Its suitability rests on its close connection to urban development, administrative simplicity, elasticity, and visible cost. Supplementary luxury and beverage taxes would give budgets qualitative flexibility. Assuming the eventual removal of rent protection, he argues that much of the rental tax would fall on ground rent rather than simply being added to tenants’ payments. Relief could protect the poorest households. Political resistance is part of the mechanism: taxpayers should assess municipal services relative to their expense. Public reporting, rather than distrustful central tutelage, would support accountability.

The Länder require a different solution because their future is entangled with Germany’s administrative organization. Schumpeter leaves their historical claims unresolved: even if federal statehood disappeared, regional political life would persist.

Unvernünftige Wünsche werden gerade dadurch hervorgerufen, daß man vernünftigen die Erfüllung versagt.

English translation: Unreasonable wishes are provoked precisely by denying the fulfilment of reasonable ones.

He therefore proposes substantially higher beverage taxation as the principal support of Länder autonomy, also enabling them to relinquish property-related revenues to municipalities. He sees the obstacle not as an unbearable aggregate tax burden but as its uneven distribution across sources. Beverage taxes promise revenue and, where they reduce consumption, greater saving. Explicit regional surcharges would also test whether citizens value autonomy enough to pay visibly for it.

The article’s enduring contribution is its account of fiscal responsibility as a political relationship. Transfers cannot substitute for self-government, and decentralization cannot work through spending freedom alone. Its concrete proposals remain conditional and deliberately incomplete, but their common principle is clear: autonomous purposes need adequate revenues and a visible, politically consequential connection between benefits and costs.