7 facts explain the dilemma: Germany has to relieve companies to save its economy
Habeck and Lindner want to relieve companies to save Germany as a place of business. Is that important? “Yes,” say the experts. But that alone will not be enough.
A few days later, Economy Minister Robert Habeck (Greens) and Finance Minister Christian Lindner (FDP) unanimously called for a tax reduction for companies. These are necessary to maintain Germany's competitiveness as a business location. There is still talk of the form of relief, while Chancellor Olaf Scholz (SPD) is moving more slowly. Seven facts explain the debate.
1. Companies pay comparatively high taxes in Germany
The Federal Republic taxes companies around 30 percent on their profits. Among OECD countries, only Portugal imposes a greater burden on its companies. Countries such as France, Great Britain and the United States charge between 20 and 25 percent. For this reason, companies in Germany pay a surcharge to be able to work here.
An important factor when choosing a location: Large companies pay a lot of attention to taxes, says Tobias Hentze, tax expert at the German Economic Institute in Cologne: “Taxes are not the only criterion. But if companies choose between comparable countries like Germany, the United States and France and pay much less taxes in one country, then they go to the country with the lowest taxes.”
Statistics already illustrate the consequences of this development: in recent years, cheaper France has attracted more investors than Germany.
2. Companies perceive high taxes as a burden
Companies are investing less in Germany due to high taxes. Surveys place the Federal Republic as one of the worst fiscal places in the world.
“That's a problem,” says Hentze. The business tax increase has slightly increased the tax burden for German companies in recent years, while many other countries have given companies relief. “This has worsened the quality of placement in this country.”
To stimulate the investments the country needs for climate transformation and economic growth, a tax break for businesses would definitely make sense.
3. High taxes are a big problem, but not the biggest
Three-quarters of all business owners surveyed cited high taxes as an obstacle to investment in a survey. This puts taxes in the middle of the list of the biggest economic problems. In a survey of family businesses, participants even more often cited bureaucracy, energy costs, a shortage of skilled workers, and wage costs as reasons for investing less. Taxes only came in fifth place.
4. High taxes are the fastest problem to solve
Experts support the federal government's strategy to reduce corporate taxes, especially because it can be implemented relatively quickly. Experts also call for, among other things, measures to achieve less bureaucracy, cheap energy and more qualified workers. However, its successes will not become evident for a few years. The federal government can reduce corporate taxes much more quickly. Hentze: “Tax cuts are a solution for tomorrow. Everything else is solutions for the day after tomorrow and beyond.”
In the long term, experts agree, the federal government must address all the problems. A tax cut alone is not enough.
5. Germany doesn't have to compete with low-tax countries, but it shouldn't be the most expensive either.
According to Hentze, tax cuts for companies currently make sense because many of the advantages that Germany used to justify higher taxes in the past have faded: companies can hardly find qualified workers anymore. Those who do, such as school dropouts, do no better on the PISA test than their peers in countries with lower corporate taxes. The infrastructure is weakening. Energy is expensive.
“If everything went well, we could also demand more taxes,” says Hentze. “But if your strengths become average, you will no longer be able to afford any weaknesses. “High taxes are a weakness.”
However, Germany still offers advantages to companies: the high density of global market leaders and innovative companies compared to many other countries makes it easier for companies to search for personnel, cooperation partners and suppliers. A large internal market supplies customers. “We don't have to compete with low-tax countries,” says Hentze. “But we shouldn't be much more expensive either.”
6. Habeck instead of Lindner, or both?
To alleviate the burden on companies, Hentze relies more on the corporate tax reform proposed by Habeck than on the abolition of solidarity proposed by Lindner. It is the most specific solution.
Corporate tax only applies to companies. Private companies and high-income people also pay on their own. Since the international companies that could invest in Germany are almost all corporations and pay corporate taxes, the federal government has the most influence there:
- Hentze estimates that the end of solidarity would only reduce the tax burden on companies by one percentage point. But it costs the federal government around twelve billion euros.
- If the federal government reduces the tax burden on companies by one percent by reducing corporate tax, this would only cost around five billion euros. Same effect, lower costs.
Hentze calls for corporate tax to be reduced to an average of 25 percent nationwide, similar to the French level. “That would be a big step. Then we would be competitive internationally.” This could be achieved gradually over five years. This would then be “possible even if the debt brake is respected and would significantly increase private investment.”
7. Uncertain implementation
It remains uncertain whether the traffic light coalition will actually reduce corporate taxes. In addition to the experts, politicians and associations in the Union are also showing their support. However, Chancellor Olaf Scholz (SPD) is cautious. Referring to the Growth Opportunities Act currently being debated in the Federal Council, Scholz said on Monday in Berlin: “We should focus on that. It is practical, tangible and works quickly.”
Another obstacle: Economy Minister Habeck wants to finance his tax cuts through a special fund, that is, through new debts that do not count in the budget and are not subject to the debt brake. Finance Minister Lindner rules it out. They both want to work together on a solution. “Now this debate is here,” Lindner said Sunday afternoon on ARD's “Report from Berlin.” “And now let's do something constructive with it.”
Experts doubt it will be implemented quickly. Michael Hüther, head of IW: “Problem analysis has always been the smallest problem for this government. It is questionable whether he still has the strength and unity to agree on anything.”
According to an analysis, Commerzbank expects strong resistance in the coalition against Habeck and Lindner's plans. The fact that high-ranking politicians from both parties are putting the issue on the agenda is progress. “After the next federal election in autumn 2025, the issue could be much higher on the agenda with perhaps a different political constellation.”
8. He does not keep all companies in Germany.
The Miele example shows why some companies are likely to emigrate from Germany even after the tax cuts. The premium household and commercial appliance manufacturer wants to relocate 700 jobs from Germany to Poland and will no longer manufacture any appliances in the Federal Republic in the future. He justifies this with the reduction in demand and lower labor costs in Poland. Tax cuts cannot eliminate both reasons.
Changes to corporate taxes are less likely to help keep all companies in Germany. Its goal is to reduce the number of emigrants and attract new companies to invest here to grow the economy.
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