Taxes in Germany—being a Federal Republic—are levied by the Federation (Bund), the States (Länder) as well as the Municipalities (Gemeinden). Many direct and indirect taxes exist, whereof income tax and VAT are the most relevant. The German word for tax is die Steuer which originates from the Old High German word stiura meaning help. It should not be confused with the word das Steuer, which means steering or helm.

Most of the revenue is earned by income tax and VAT. The revenues of these taxes are distributed between the federation and the states by quota. The municipalities receive a part of the income of the states. In addition, there is a compensation between rich and poor states (Länderfinanzausgleich, Art. 107 para. 2 Grundgesetz).

Taxation principles

The German constitution (Grundgesetz) lays down the principles governing taxation in the following articles:

• The ability-to-pay principle (Art. 3 para. 1 Grundgesetz)
• Equality in taxation (Art. 3 para. 1 Grundgesetz).
• The lawfulness of taxation (Art. 2 para. 1 and Art. 20 para. 3 Grundgesetz)
• The welfare state principle (Art. 20 Grundgesetz)

The right to decide on taxes is subdivided:

• The federation has the right on customs. (Art. 105 para. 1 Grundgesetz)
• The federation and the states decide together on most of the tax law. Formally, the states can decide that there is no federal law. In practice, there are federal laws for all taxation issues. (Art. 105 para. 2 Grundgesetz)
• The states decide on local excise taxes. (Art. 105 para. 2a Grundgesetz)
• The municipalities and the districts (Kreise) can decide on some minor local taxes like the taxation of dogs (Hundesteuer).

So even if Germany is a federal state, 95% of all taxes are imposed on a federal level. The income of these taxes is allocated by the federation and the states as following (Art. 106 Grundgesetz):
The federation receives exclusively the revenue of:
Customs
Taxes on alcopops, distilled beverages, coffee, mineral oil products, sparkling wine, electricity, tobacco, and insurances
Supplement on income taxes so-called solidarity surcharge (Solidaritaetszuschlag)
The states receive exclusively the revenue of:
Inheritance tax, real property transfer tax
Taxes on cars, beer, and gambling
Fire protection tax
The municipalities and/or districts receive exclusively the revenue of:
Real property tax
Trade Tax (Gewerbesteuer)
Taxes on other beverages, dogs, and inns.