Germany's economy is facing a prolonged recession, with GDP stagnating for two years and not surpassing pre-pandemic levels. Factors such as increased borrowing costs, constrained energy supplies, and trade disruptions due to international conflicts have contributed to this situation. The capital- and energy-intensive export industries and construction sectors are particularly affected.
In light of these challenges, tax policy could play a significant role in stimulating growth. Reducing Germany’s corporate tax rate from approximately 30 percent to 25 percent is being considered as a measure to encourage investment by lowering the cost of capital. "Cutting Germany’s high corporate tax rate can stimulate investment by lowering the cost of capital and reducing inefficiencies in asset allocation and financing," according to experts.
Germany currently has one of the highest combined corporate tax rates in the Organisation for Economic Co-operation and Development (OECD), exceeded only by Portugal at 30.5 percent and Colombia at 35 percent. Both the Christian Democratic Union and the Free Democratic Party have proposed reducing Germany’s combined corporate tax rate to below 25 percent, closer to the OECD average of 23.85 percent.
The federal rate stands at a uniform 15 percent, plus a 5.5 percent solidarity surtax, while local business taxes make up the rest of the combined rate. Evidence suggests that local business taxes are more harmful relative to their revenue generation, indicating potential areas for restructuring.
Tax Foundation Europe model simulations estimate that moving to a 25 percent combined corporate rate would boost Germany’s investment by 1.4 percent, GDP by 1 percent, and wages by 0.8 percent based on the economic conditions of 2022.
However, cutting the corporate tax rate would initially reduce federal revenue by €15.4 billion but could be partially offset over time with increased investment leading to higher business incomes.
To achieve sustainable economic growth beyond just cutting rates, policymakers are advised to focus on improving capital cost recovery provisions allowing businesses to deduct more from taxable income when making new investments.
In conclusion, while reducing Germany's corporate income tax rate is seen as a positive step towards competitiveness, further reforms in business taxation structure may be necessary for long-term economic benefits.