Taxes Matter in Germany

November 3, 2006

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 tax 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 tax 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 tax rate to increase its competitiveness globally, as Chris Atkins and Scott Hodge argued in “U.S. Lagging Behind OECD Corporate Tax Trends.”

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