German Corporate Tax Reform Plan Attacked From All Sides
June 23, 2006
The plan, which is scheduled to take effect in 2008, would cut Germany's corporate tax from 25 percent to 12.5 percent, which would result in the total effective tax burden on corporations falling from 38.5 percent to just below the 30 percent mark.
The reform is aimed at making Germany a more attractive place to do business, particularly for large corporations, who are increasingly moving operations offshore to countries with lower tax rates, and to attract investment. Germany's current corporate tax rate of just below 39 percent is the highest in the EU. The new rate would put Germany in the middle of the EU field.
The moves have been triggered largely by several new eastern European EU members who have slashed their corporate taxes and have become increasingly attractive as places to do business. Corporations in Poland, for example, pay 17.4 percent; in Estonia, the rate is 23 percent; and the standard corporate tax in Slovakia is fixed at 19 percent.
Big German companies such as Siemens and Volkswagen could pay a fifth less in tax when the measures go into force. Still, the plans are not being met with jubilation from many economists and industry groups. Nor do those on the left politically see much to cheer about.
Business not exactly cheering
For pro-business groups, Social Democrat Steinbrück's reforms do not go far enough. Plans to broaden the tax base to recoup some of the estimated eight-billion-euro ($10 billion) revenue shortfall that would result from the cuts in the first year could cancel any positive effect, they say.
"Companies won't profit very much from these reforms," said Thomas Hüne of the BDI Federation of German Industries. "While tax rates will be decreased, the tax base will grow, meaning it will be a zero-zero game for German companies."
It is primarily this expansion of the tax base to include interest, rental and leasing income as well as licensing fees that has many business groups unhappy.
Winfried Fuest, an economist and partner at the Cologne Institute of Business Research, said small and medium-sized companies, which make up the bulk of German companies, would see little, if any, tax relief -- largely because of these communal business tax increases that are likely to go into effect as corporate rates are slashed.
"We welcome the cut in corporate taxes, of course, but this plan is schizophrenic," Fuest said. "It just provides relief to high-yield companies. Those who have weaker earnings will likely be looking at an additional tax burden."
He would like to see the communal business tax done away with all together and replaced with another model. But since it is an important revenue stream for municipalities, they will fight tooth and nail to maintain it, he said.
Fuest added that his and other business groups would like to see an effective corporate tax rate fall to below 25 percent in order to effectively compete with low-tax countries to the east, although that would entail large-scale cuts in social services.
"I'm too much of a scientist, a realist, to consider that a real possibility," he said.
Left-wing anger
Criticism of the plan has come from the left as well. But they argue that the plan is a giveaway to corporations at the expense of everyday citizens, which will be especially painful after the value-added tax (VAT), a kind of sales tax, rises three percentage points to 19 percent in 2007.
The VAT increase was approved by parliament on June 16 and is the country's biggest tax increase in six decades.
"No one is going to have much understanding for the fact that one point of this three-point VAT tax is supposed to compensate for a cut in corporate taxes," said a statement released by the "Parliamentary Left," a group of 100 Social Democrats in the Bundestag. It added that a competition to see who can cut taxes the most is the wrong approach to economic policy.
"They're reaching into the wallets of the little people to give corporations tax relief," Renate Künast, Green Party parliamentary group leader, told reporters.
The tax plan is part of a raft of reforms that the governing grand coalition of Christian Democrats and Social Democrats are trying to agree upon before parliament begins its summer recess on July 7.