The idea is met with a lot of approval: Economics Minister Robert Habeck (Greens) and Finance Minister Christian Lindner (FDP) have put lower taxes for companies up for discussion. “It would make sense to stimulate the economy through tax cuts,” says Veronika Grimm from the Council of Experts, whose members are known as “the economists.”
The economic logic of a corporate tax reform: Companies have more of their profits and they invest the money in new factories, innovations and climate-neutral technology. These investments then increase economic growth and create new jobs.
Economists favor tax cuts for the economy because competition then determines which companies benefit the most. “Tax cuts are significantly better than subsidies,” says economist Grimm. “Lower taxes help everyone, no one is left out in the cold. Subsidies only help those the state has chosen as winners.”
In Germany, companies generally pay around 30 percent taxes on their profits. Compared to similar countries, the Federal Republic is quite far ahead. There is now discussion about reducing this tax rate for companies. “That would be important as a strong signal,” says Dominika Langenmayr from the University of Eichstätt-Ingolstadt. The tax rate is of great importance for international companies that decide in which country to invest, says Langenmayr, who is also a member of the independent Scientific Advisory Board of the Federal Ministry of Finance. CEOs also know the graphics with the tax rates.
It is possible to roughly estimate what such a reform would cost. It helps to take a look at corporate income tax. It is 15 percent and therefore accounts for half of the total of around 30 percent taxes on corporate profits; the other half is the trade tax, which varies in different municipalities. A possible reform would be to reduce corporate tax from 15 to ten percent in order to drop overall taxes for companies from 30 to 25 percent. The corporate tax has to go to the state according to the Federal Statistical Office most recently brought in around 40 billion euros per year. If you cut a third of this income, the state would be missing around 13 billion euros – that would be the direct costs. However, some companies would not benefit from this reform due to their legal form.
It is controversial how such a tax cut could be financed. There are four economic options for balancing the costs. First, other taxes could be increased by the same amount. Secondly, the reform costs could be offset through credit, i.e. through new national debt. Thirdly, tax cuts could improve the economy, i.e. allow the economy to grow in such a way that additional tax revenue is generated. Fourth, previous editions can be canceled.
A coherent reform cannot be thrown out of hand, says Veronika Grimm
Tax increases are unpopular, even SPD voters prefer them according to the elections research group mostly other options. Habeck made his proposal in connection with new debts; he advocates for another so-called special fund. “That’s not a good idea,” says Veronika Grimm. Germany must be careful not to overextend itself when it comes to national debt – so that future generations still have leeway to react to crises. The fact that Habeck is now offering a corporate tax reform is probably aimed at getting the FDP and the Union to take on additional debt, she says: “That could be a fig leaf.”
The hurdles for additional national debt have been high since the Federal Constitutional Court’s ruling. Without credit, funding remains a mix of options three and four: higher growth and cutting other government spending. “It is unrealistic that a reduction of five percentage points is completely self-financing,” says researcher Langenmayr. “But it is precisely higher investments that generate substantial additional income.”
As a result of a corporate tax reform, a little bit of money automatically remains with the state. There could be a single-digit billion amount left over that would have to be saved elsewhere. That corresponds to less than one percent of all government revenue. Depending on your perspective, that’s not much – or far too much for a coalition and its austerity package of a similar magnitude after the Karlsruhe verdict has just caused a lot of anger and protest.
“You can’t pull off a major, coherent tax reform anyway,” Veronika Grimm points out. “That takes a long time. It is doubtful that the traffic lights currently have the power to do this.”