The Federal Government Is Not Taking Full Advantage of Its Possibilities


ZEW Analysis of the Second Coronavirus Tax Assistance Act

The study examines the effects of the Second Corona Tax Assistance Act on the effective tax burden of German enterprises. It turns out that small enterprises are hardly relieved.

The Second Coronavirus Tax Assistance Act (“Zweites Corona-Steuerhilfegesetz”) is not ambitious enough to cushion the effects of the crisis. In the way the measures are currently designed, particularly small companies benefit little from the tax reliefs. Relative to the severity of the crisis, the measures are, overall, too soft and not innovative enough. These are the results of a study conducted by a team of researchers at ZEW Mannheim and the University of Mannheim, which was published in the journal “Der Betrieb”. “With the Second Coronavirus Tax Assistance Act, legislators will achieve a fast, but rather modest boost,” concludes ZEW Research Associate Professor Christoph Spengel, who holds the Chair of Business Administration and Taxation II at the University of Mannheim. “The measures fall short of what is necessary to address the severity of the crisis. The coronavirus crisis is hitting the German economy harder than the financial crisis did. It would therefore be appropriate to introduce more far-reaching measures.”

The conducted analysis is twofold: On the one hand, the researchers investigate the impact of the Second Coronavirus Tax Assistance Act on the effective tax burden of German firms. On the other hand, the consequences of suspending the minimum tax on profits is also examined. To this effect, the researchers use the simulation model “European Tax Analyzer” which computes the corporate tax burden associated with tax measures for different crisis scenarios.

Study examines the impact of the Second Corona Tax Assistance Act for the first time

According to the researchers, the minimum tax provision could also cause problems in the coming years. This provision limits the deduction of losses incurred in previous years to 60 per cent of the revenues that exceed a specific threshold. Due to the absolute threshold, companies can be taxed on up to 40 per cent of their profits, even if they incur substantial losses. This limits companies in their ability to offset the losses suffered due to the current crisis and withdraws much-needed liquidity. “The losses incurred in 2020 have the potential to exacerbate the negative effects of the crisis, which can only be mitigated by temporarily suspending the minimum tax,” says Christoph Spengel. “This would not increase the burden on public budgets in a significant or permanent way.” To prevent deadweight effects, the minimum tax should continue to apply to losses incurred before the crisis.

The researchers conclude that policymakers could achieve a much greater boost if they were to implement these additional measures. Since the tax liability is merely postponed as a result of these measures, these tax reliefs would not create any significant costs for the German budget due to the current low-interest rate environment.