Germany debates corporate tax reforms amid economic slowdown

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Germany debates corporate tax reforms amid economic slowdown

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Daniel Bunn President and CEO at Tax Foundation | Twitter Website

The German economy has been shrinking for two consecutive years, and business confidence remains low. Policymakers are now debating tax policy reforms to enhance Germany's attractiveness as a business location and stimulate economic growth.

Germany has become less appealing to investors, with rankings such as the IMD World Competitiveness Index reflecting this trend. The country faces structural challenges including high energy prices, trade frictions, bureaucratic processes, a shrinking workforce, and deteriorating infrastructure. Short-term tax incentives may provide temporary relief but cannot replace the need for long-term structural changes.

One significant issue is Germany's high corporate tax rate of about 30 percent, which is higher than in many Western economies. This places Germany at a competitive disadvantage in attracting international investments. High corporate taxes deter real economic activity rather than just triggering profit shifting.

Generous tax deductions can encourage investment among small and medium-sized enterprises (SMEs), especially if they face liquidity constraints. The outgoing government proposed more generous tax deductions for fixed assets, but the proposal did not pass before the coalition broke up.

Innovation is crucial for growth, and R&D tax incentives are important in fostering innovation. Although Germany introduced an R&D tax incentive in 2020, challenges remain outside of taxation, such as regulatory constraints and access to finance.

Financing tax cuts poses a challenge given current government spending needs on military obligations and public infrastructure improvements. Options include adjusting ineffective subsidy programs or reforming the constitutional debt brake to facilitate borrowing. Raising less distortive taxes like value-added tax could also be considered to offset revenue losses from corporate tax cuts.

In conclusion, prioritizing measures to improve Germany's competitiveness as an investment location is essential. Reducing corporate taxes should be part of this strategy as it would send a strong signal to investors.

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