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Taxes Matter in Germany

1 min readBy: Curtis S. Dubay

It is often argued that taxes do not matter to businesses. Apparently that is not the case in Germany. From the International Herald Tribune:

The German government agreed Thursday on a plan to cut its average corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate in a bid to encourage investment in Europe’s largest economy. The step will take Germany from having the highest levy in Europe to one that is broadly in line with the other rich countries of Western Europe.

Germany felt pressure from former Soviet block countries that are growing rapidly due in part to their low-rate flat taxes:

[Former] chancellor, Gerhard Schröder, a Social Democrat, pushed the idea in response to Germany’s neighbors to the East, which embraced much lower rates.

Slovakia, for example, in 2003 adopted a 19 percent flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. applying to sales, corporations and individuals.

Austria, whose economy is closely linked with its eastern neighbors, dropped its tax rate to 25 percent from 34 percent in 2004 – a sign that the mood was changing in richer parts of Europe. Now, the view that countries have no choice but to play the reduction game seems to have arrived in Germany.

In today’s global marketplace corporations are mobile, and those countries with the best tax systems will ultimately be best at attracting new companies to their borders.

No government, either at the national or sub-national level, enacts changes to its tax system in a vacuum. Any tax change a government makes, positive or negative, impacts its competitiveness. This is the theme behind the Tax Foundation’s State Business Tax Climate Index.

The United States would be well advised to lower its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate to increase its competitiveness globally, as Chris Atkins and Scott Hodge argued in “U.S. Lagging Behind OECD Corporate Tax Trends.”