“Small Steps in the Right Direction”

Federal Finance Minister Christian Lindner plans to relieve the economy through a comprehensive tax reform package. Dr. Katharina Nicolay, a junior professor and tax expert at ZEW, evaluates the package as follows:

“Lindner’s package represents a series of small steps in the right direction. The profit-independent premiums for green investments can help to master the energy transition. It’s a good thing that the investment premium, unlike immediate write-offs, also has a positive impact on the liquidity of companies even when they incur losses. However, it should be noted that the future depreciation potential of the subsidised assets is reduced by the premium. For small and medium-sized enterprises, it may prove burdensome that they can only submit two applications during the funding period (2024–2027), with each application requiring a minimum base amount of 50,000 euros. This leads to increased planning effort. Moreover, as the incentives are limited to specific climate protection investments, they fail to create broad investment stimuli. Consequently, the reform will not alter the fact that Germany has the third-highest corporate tax burden among 35 industrialised countries, as shown by the Mannheim Tax Index we calculated.

The expansion of tax research funding is to be welcomed, as Germany has lagged behind in this area compared to international standards. Eligible expenses, which were previously mainly limited to R&D staff, will now be extended. Additionally, the basis for the funding allowance will be tripled. With this measure, Germany is aligning with the trend observed in other countries, such as the recent significant expansion of tax research funding in the United States. This measure is expected to improve the conditions for investment in research and development and ensure that Germany keeps pace with international R&D locations.

In parallel with the targeted measures, the expansion of loss offsetting possibilities enhances investment incentives for all companies. By facilitating better offsetting of losses, a larger proportion of profits can be shielded from Germany’s high corporate tax burden. Particularly for high-risk investments, it is noteworthy that the state’s increased involvement in investment risk through improved loss offsetting fosters a more symmetrical treatment of gains and losses.”