Statement on Proposed Tax Reform


The Centre for European Economic Research (ZEW) and Prof. Jacobs, chairholder at the University of Mannheim, analysed the draft legislation for the corporate tax reform for 1999, 2000 and 2002 with respect to its economic impact on the business sector, as well as some aspects concerning the tax system. Thereby, the resulting effects for the corporate tax burden induced by the planned changes in taxation were calculated by using the European Tax Analyzer, which was developed by ZEW in close cooperation with Prof. Jacobs of the University of Mannheim. In this respect, it was established that during the first step of the reform programme business conditions tend to deteriorate slightly. By contrast, the proposed measures for 2002 revealed an improvement of conditions.

Tax Burden and Tax Revenues

The reform measures of 1999 include a relieving effect through the reduction of the tax rate, as well as a burdening effect through the broadening of the tax assessment base. Depending on the specific sector-related characteristics of the business, these contrasting measures presumably bring about an increase of the tax burden in most cases. By tendency, the first step of the reform programme is likely to provide only little impetus for growth concerning the investment choices and labour demand of businesses. The reason therefore lies in the widely prevailing revenue-neutrality. Only by means of a net tax relief in the business sector that clearly positive results can emerge. 

International Competitiveness

The first step of the reform measures (1999) does not mark any improvement for the competitive situation of German businesses on an international comparison. In the majority of cases the increase of the tax burden leads to a considerable decrease in attractiveness for Germany as a business location.

Eco-Tax Reform

The proposed ecological tax reform 1999 barely has any impact on the business' overall tax situation for its low tax rates and added exemptions. This applies to all investigated sectors, except for the transport sector. However, the reform only generates extremely small incentive effects to reduce environmental pressure at company level, making it barely feasible to achieve the proposed objective to improve climate protection. Especially due to the exemption of coal from taxation it remains questionable whether a reduction of CO2 emissions can be achieved.

Evaluation of the Tax System

The idea behind the proposed reform is to tax companies in a similar way as employees, that is, according to their actual financial performance. However, an equal treatment of the various types of income will per se not be attained as long as profit income and surplus income are determined according to different standards. To prevent unequal treatments concerning different levels of income, certain changes in legislation are undertaken which override any previous conventional balance sheet recording practices. There is no discernible uniform system behind such haphazard individual regulations, like e.g. the future handling of provisions, which runs contrary to the proposed objective of a "simplification of the German tax law" (at least with respect to the determination of profits).


In summary, the corporate tax reform measures for 1999 are to be judged negatively since the proposed changes are unlikely to provoke any positive growth impetus, while at the same time the tax burden will even be increased for the majority of industry sectors. Furthermore, the objective of a long-term improvement in climate protection will not be achieved through the proposed ecological tax reform. For this purpose, it would make more sense to implement a European-wide environmental tax. The proposed reform measures for 2002 should therefore bring about a significant relief for companies.

The implementation of a corporate tax, independent of a company’s legal form and with a rate of 35 %, can make an important contribution to that end. Possible measures to offset the rate reductions were not sufficiently specified yet. A reduction to a maximum of 25 % of the declining balance method as a reciprocal financing strategy, for instance, still leads to a discernable tax relief for the majority of companies. Hence, favourable effects with respect to the companies' willingness to invest could be achieved with resulting positive impacts on for the labour market. On an international comparison this would indeed lead to an improvement of the competitive situation of German companies; however, the tax burden would still be significantly higher than in Great Britain or the Netherlands. Taking the additional burden presented by the business tax and the solidarity surcharge in Germany into account, the reform 2002 should rather be considered as a commitment to a corporate tax reform.


Katrin Voss, E-mail: