The study examines how efficient and well-targeted the German government’s income tax measures are in mitigating the economic consequences of the coronavirus crisis in Germany. To this end, the researchers have evaluated various income tax measures, especially the more generous tax loss deduction, the increase in the tax allowance for trade tax additions and the extension of previously applicable depreciation methods. The measures are suitable to secure a company’s liquidity and lead to a deferral of the tax payment. Due to the current low interest rate environment, no significant costs for the government are incurred. However, since there is no permanent tax relief for companies, the measures fall short of their goals, according to the study. In terms of company size, it can be seen that it was mainly medium-sized and large companies that benefited from the increases in the amount of the loss carry-back and the allowance for trade tax additions. In contrast, the relief for smaller companies and start-ups is very limited.
“Considering the magnitude of the crisis, the measures do not go far enough. The COVID-19 crisis has hit the German economy much harder than the financial crisis. Therefore, more far-reaching measures would be appropriate,” says ZEW Research Associate Professor Christoph Spengel, who holds the Chair of Business Administration and Taxation II at the University of Mannheim, summarising the results. Professor Karl-Heinz Paqué, Chairman of the Board of the Friedrich Naumann Foundation, adds: “The report shows that it would have been possible to provide targeted, fast and unbureaucratic support for companies via tax law. Unfortunately, policymakers lacked the political courage and prudence to do so. This would have prevented a lot of bureaucracy and fraud-prone application procedures.”
Expanding tax measures and making them more effective
In order to lift the burden on businesses, further measures are needed. Among other things, an extension of the loss carry-back period would be much more effective, especially for small and medium-sized enterprises. Furthermore, the researchers argue for a suspension of the minimum taxation of crisis-induced losses, as it threatens to slow down the economic recovery of companies by taxing profits despite high existing loss carry-forwards. “It will only be possible to stop the losses incurred in 2020 and 2021 from exacerbating the crisis if the minimum tax is also temporarily suspended. This wouldn’t significantly burden the state budget,” Spengel says.
Implementing more generous depreciation rules would also benefit all businesses – and encourage them to make more future-oriented investments. Instead of broad-based support, deficits could be offset by providing more targeted tax benefits. For example, regulations such as the investment deduction, from which small and medium-sized enterprises in particular can benefit, would be a good idea.
Other countries much more business- and growth-friendly
When looking at other countries, it also becomes apparent that a readjustment of the German COVID-19 tax aids is advisable. The USA or Great Britain and Northern Ireland, for example, have adopted much more generous emergency measures with respect to loss offsetting or depreciation rules in order to cushion the economic consequences of the pandemic for companies. To ensure that German companies do not lag behind in international competition in the future, the authors of the study recommend that policymakers create more business- and growth-friendly regulations. “Now it is important to set the right course for the future. Companies want and need to invest in order to be successful in the future. We need an investment pact for Germany to ensure that the transformation towards a digital, climate-neutral and social economy succeeds in the future. Remaining competitive in international corporate taxation must be a key component of this investment pact,” says Professor Karl-Heinz Paqué.