Germany as a Tax Location: German Businesses Face Two-Fold Tax Burden

In international comparison, businesses in Germany are not only subject to a comparatively high effective tax burden, but they also face disadvantages in the competition for highly qualified workers.

In Germany, an employer must spend almost EUR 200,000 a year in order that the income of a highly qualified worker, following tax and charges, is over EUR 100,000. In the USA, however, a business must spend in the region of only EUR 153,000 for this to be the case. Businesses in the Swiss Cantons of Zug and Schwyz enjoy the lowest levels of expenditure; they must spend only around EUR 130,000. Along with the high levels of company taxation, this represents a further disadvantage faced by businesses in Germany in the competition for highly qualified workers. These are the findings of a study carried out by the Centre for European Economics Research (ZEW), in Mannheim, on behalf of the IBC BAK International Benchmark Club of BAK Basel Economics.

Along with the tax burden in Germany and eleven Swiss cantons, the study also considered the burden faced by businesses located in the USA (Massachusetts), in Great Britain, Ireland, France, Italy, the Netherlands and Austria. The tax burden indicators took all types of tax which apply to employee incomes, and corporations’ profits, into account. High effective tax burdens on highly qualified workers are primarily the result of provisions pertaining to retirement insurance. The effective tax burden on businesses, however, is largely determined by rates of income tax, and, particularly in France, by tax rates for non-income values.

Comparison of effective tax burdens across countries and regions illustrates that the effective tax burden on highly qualified workers is lowest in Switzerland and in the USA. Great Britain, Ireland, the Netherlands and Austria have the next lowest tax burden. The highest levels of effective tax burden apply in Germany, Italy and France. The effective tax and charge burden shows huge variation, however, when the value of the total income varies. Despite such variation, the rankings of the locations analysed barely change.

Given that highly qualified workers are internationally mobile, employing them means that businesses must engage in world-wide competition. The study thus showed that these workers demand higher levels of net pay from their employers in countries where the tax and charge burdens are higher. Higher pay should compensate for the large reductions made. Where employees’ demands are met, the employment of these workers becomes more expensive for the businesses themselves. The fact that the tax and charge burdens in Germany are amongst the highest measured indicates that businesses in Germany are at a considerable competitive disadvantage. Businesses in Germany can only offer highly qualified workers the same net pay as they might be offered in Great Britain, in the USA and in Switzerland, if these businesses are prepared to pay a higher net wage.

Looking at levels of company taxation only confirms these assertions. Locations which already have a competitive advantage in terms of a low company tax burden often further improve their attractiveness as a business location by offering comparatively advantageous tax conditions for highly qualified workers. A notable exception to this is the USA, where businesses are subject to high levels of taxation, but highly qualified workers are only moderately taxed. The opposite is true in Ireland. Corporations are attracted to Ireland by the rate of corporate income tax, which currently stands at 12.5 per cent. The tax burden on highly qualified workers, however, remains in the mid-range when compared to those in other locations.

In order to determine the tax burden on highly qualified workers, ZEW developed a new calculation model. The company tax burden, however, was calculated using the internationally established method from Devereux and Griffith. The study’s structure does not allow for direct comparison showing whether employees themselves are more or less highly taxed than the capital invested. Having said this, the study does allow evaluations to be made regarding the overall attractiveness of countries and regions as business locations. The IBC BAK International Benchmark Club from BAK Basel Economics aims to support policy-makers in the fields of politics and economics in their efforts to carry out economic analysis of the strengths and weaknesses of individual regions and countries as business locations. The latest study has clearly contributed to this aim.

Contact

Marc Bros de Puechredon (BAK Basel Economics), Phone: +41 (0)61/27997-25, E-mail: puechredon@bakbasel.com (Information about, "IBC BAK International Benchmark Club®" of BAK Basel Economics)

Dr Christina Elschner, Phone: +49(0)621/1235-162, E-mail: elschner@zew.de (Questions regarding content/ taxation of highly qualified workers)

Dr Lothar Lammersen, E-mail: lammersen@zew.de

(Questions regarding content/ company taxation)