Mid-term Review of German Tax Policy: First Signs of Continued Stagnation in the Current Legislation Period

Since the reform of the corporation tax in 2008/2009, businesses in Germany have been witness to far-reaching stagnation in the general taxation of businesses. Analysis carried out by the Leibniz-WissenschaftsCampus MannheimTaxation (MaTax) of the Centre for European Economic Research (ZEW) shows that any changes made to tax policy within the current legislation period concern only the abolition of anti-constitutional policies, such as the inheritance tax. At the same time, local tax rates are increasing. The passivity in Germany shows a clear contrast to the activities in other EU Member States, where income tax rates for corporations continue to fall. Looking exclusively at the taxation of corporations, quantitative analysis of the effective tax burdens in the EU shows that Germany has now fallen behind Italy.

Within the current legislation period, the Federal Constitutional Court has already declared regulations relating to inheritance tax and land transfer tax to be anti-constitutional. Calculation of the land transfer tax, now based on outdated assessment criteria, is also awaiting review by the Federal Constitutional Court. Taxation reforms, which if implemented might, for example, further complicate inheritance tax policy in Germany, are prompted only by impulses given by the German courts.

At the same time, nearly all forms of local taxation show increased tax rates. In certain regions, the rate of land transfer tax, set by individual Federal States, has almost doubled since 2006. Increases can also be seen in municipal tax rates (real estate tax, local profit tax). The tax burden on the profits of corporations in municipalities with more than 50,000 inhabitants increases from 30.95 per cent (2008) to 31.47 per cent (2015).

This development is somewhat alarming. Not, however, because of the increase in the tax burden itself, but rather because this increase contradicts the trend witnessed throughout the rest of Europe. The average tax burden on corporations in all 28 EU Member States has fallen to 22.90 per cent in 2015. In the period from 2013 to 2015, the tax burden in Great Britain, for example, fell from 23 per cent to 20 per cent and further decreases have already been announced.

A comparison of the effective tax burden on a model company clearly indicates the consequences of this development. As part of this simulation, the effective tax burden on a model company was calculated for 10 simulation periods. Looking only at taxes paid at corporate level, the model company would be subject to a tax burden amounting to EUR 55.31 million in Germany in 2015. Such a value sees Germany currently ranked 23rd amongst all 28 EU Member States, thus being overtaken in the rankings by Italy. In other major EU States, such as Spain, the effective tax burden has also shown significant decreases. Looking at the overall tax burden (including taxation of shareholders), however, the situation seems to have remained unchanged. With an effective overall tax burden of EUR 88.55 million Germany ranks 24th.

All in all, the taxation conditions for companies choosing to locate in Germany are becoming less attractive. Whilst in other EU Member States, the effective tax burden is being significantly lowered, the effective tax burden in Germany is continuing, albeit slowly, to increase.

For more information please contact

Rainer Bräutigam (ZEW), Phone +49(0)621/1235-163, E-mail rainer.braeutigam@zew.de

Prof. Dr. Christoph Spengel (ZEW and University of Mannheim), Phone +49(0)621/181-1704,

E-mail spengel@uni-mannheim.de