Tax Reform 2001: Germany and France Gain in International Competitiveness

At the turn of the year, the first measures implemented as part of the 2000 tax reform have come into effect in Germany and France. Both France and Germany hope that these reforms will improve the investment conditions in their respective countries and thus increase their international competitiveness. The impacts of reforms have been examined by the Centre for European Economic Research (ZEW), Mannheim, and the University of Mannheim using their computer simulation programme, "European Tax Analyzer". This enabled analysis of the tax burden faced by a representative medium-sized corporation in the manufacturing industry and by its shareholders.

Analysis of the corporation tax showed that the effective tax burden in Germany has fallen within the ten year period considered from 32.8 per cent in 2000 to 30.1 per cent in 2001. This constitutes a reduction in the tax burden of 8.2 per cent. The tax burden on the equivalent French company, however, fell by 1.3 per cent, from 38.9 per cent to 38 per cent. Looking however, at the reforms planned to be implemented in France before 2003, it appears that French firms will be subject to a greater tax burden. In comparison to 2000, the tax burden now totals only 30.6 per cent. This constitutes a reduction in the tax burden of 20.3 per cent. If all reform measures planned until 2003 are taken into account, the existing tax advantage enjoyed by German businesses in 2000 will fall from 15.7 per cent to 1.6 per cent in 2003.

A detailed analysis of the impacts on the tax burden shows that for German firms, the reduction in the tax burden, which as a result of the reduction in the corporation tax should fall by 25 per cent, will be offset by almost 50 per cent by worsening depreciation conditions. Whilst for the equivalent French business in 2001 the factors contributing to an increase or decrease in the tax burden remain largely balanced, by 2003 factors leading to a reduction in the tax burden, particularly as a result of cuts in French corporation tax (taxe professionnelle), will outweigh factors leading to an increase in the tax burden due to worsening depreciation conditions.

The tax situation of shareholders must also be taken into account when it comes to the analysis of medium-sized companies. In the case of Germany, this means that the reduction in the income tax rate planned for 2005 must be considered. Subsequent to cuts, the tax burden of the businesses concerned shall fall from an effective 37.4 per cent in 2000 to 30.1 per cent in 2005. This constitutes a fall of 19.5 per cent in the tax burden for shareholders. In France, new measures are planned to be implemented into 2003, and this should result in a reduction in the tax burden of 16.5 per cent, from 47.8 to 39.9 per cent. Whilst the tax advantage for German companies over French companies shall fall from 15.7 to 1.6 per cent in 2003, the difference between the tax burden on shareholders in Germany and France will increase slightly from 21.8 to 24.6 per cent. This is a result of the recent introduction of the half-income method in Germany, and the considerable reduction in the German income tax rate. If the tax burden is calculated according to the typical shareholder structure of a medium-sized company with a small number of shareholders, the tax burden arising from income tax in France is too low. In contrast to the cut in record levels of income tax, from 51 per cent to 42 per cent in Germany, the rate of income tax in France was reduced by only 1.5 per cent to 52.5 per cent. In addition, the capital tax on shareholders has also been increased in France.

Looking at the situation in other countries, it appears that tax reforms will increase the relative competitiveness of businesses in both France and Germany, in terms of the tax burden placed on shareholders. Neither of the two countries, however, will become low-tax areas. It is much more the case that the tax conditions will become increasingly similar to those in the Netherlands, Great Britain and the USA. The representative company in the manufacturing industry would still be subject to a much lower tax burden in the Netherlands and Great Britain than it would be in Germany. The tax advantage totals 25.4 per cent in the Netherlands, and 43.4 per cent in Great Britain. The tax advantage in the USA, however, shall fall by 1.3 per cent. In the case of all three countries, no changes to taxation which are of relevance to the calculation have been announced for the coming year.

The situation in Germany will be somewhat different following future changes to the corporation tax, which will impact on medium-sized companies. Subsequent to the tax reductions, which are set to continue into 2005, the tax burden in Germany will be the lowest worldwide, second only to that in Great Britain. Particularly in France, medium-sized companies continue to be disadvantaged by a greater tax burden. For medium-sized companies a corporation with typically few shareholders and high levels of income was also considered. No calculations were carried out for partnerships.

Contact

Dr. Gerd Gutekunst, E-Mail: gutekunst@zew.de

Rico Hermann, E-Mail: hermann@zew.de

Dr. Thorsten Stetter, E-Mail: stetter@zew.de