Corporate Tax Reform – Opportunity for Germany as a Business Location

The Petersberg tax reform proposals as well as the model of a taxation including consumerism and adjustment in rates are two concepts which continuously crop up in the discussion about the corporate tax reform. Both proposals are expected to cause a significant impact regarding investment and innovation in form of a reduction of the effective overall tax burden. When compared to the prevailing conditions in 1997, the overall tax burden for business would be reduced by 14 to 20 per cent in the case of the Petersberg tax proposals, and by 25 to 50 per cent in the case of a taxation including consumerism and adjustment in rates. These are the findings of a study carried out by the Centre for European Economic Research (ZEW) in Mannheim on behalf of the Federal Ministry for Education, Science, Research and Technology. The study analyses the effects of the effective overall tax burden as well as the resulting changes concerning the innovation and investment behaviour of innovative and non-innovative companies, in the case of the Petersburg proposals or the taxation including consumerism and adjustment in rates would being implemented.

The basic ideas behind these concepts are completely different. In the case of the Petersberg proposals, the tax relief is primarily induced by two measures, namely a reduction of tax rates in combination with a broadening of the tax assessment base. By contrast, the positive effects of the taxation including consumerism and adjustment in rates are most of all provoked by an adjustment in rates when calculating profits. This would reduce the burden on businesses even if the tax rates remained unchanged. Even though some of the Petersberg proposals have already been implemented in the German Annual Tax Act 1998 (“Jahressteuergesetz 1998”), it would be desirable to remove existing fiscal investment and innovation barriers by designing a corporate tax reform based on the taxation model including consumerism and adjustment in rates, since this would cause the greatest relief for businesses. As a result, the competitive position of Germany as a business location would be strengthened in the long term with positive effects on employment.

Contact

Katrin Voss, E-mail: voss@zew.de