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In this post we explain the impact of a tax rate reduction and that of special depreciations for companies. In doing so, we justify why which discharge is preferable over the other and how this should be taken into account when choosing a company location.

1st Tax Rate Cut vs. Special Depreciation

At the end of 2019, the Federal Ministry of Economic Affairs published four core elements on a possible corporate tax reform. In addition to an improvement in the recovery benefit (§ 34a EStG) for partnerships, this included in particular a reduction in the corporate tax burden. At the heart of these proposals is the desire to reduce the tax burden on companies, and in particular on corporations, in order to be able to compete internationally. This is due, among other things, to the fact that in the USA the corporate tax burden has been significantly reduced. In 2018, the Federal Corporate Income Tax was reduced from 35% to 21%.

The tax rate reduction and the special depreciation are among the tax policy strategies for reducing the tax burden. The corporate tax burden is permanently reduced by the tax rate reduction. Temporarily, however, companies can be relieved by special depreciation. We explain the impact of the methods and companies can consider them in their choice of location.

2. On these factors depends location attractiveness

The choice of location depends not only on taxes. The supply of qualified workers, customer proximity, wage levels and infrastructure are also of great importance. In addition, the stability of the political and regulatory regime is also crucial.

In Germany, the strengths lie in the areas of innovation capability, macroeconomic stability, workforce, market size and infrastructure. There are weaknesses in the financial system and health. The lack of infrastructure is also often criticised. Germany is also rather poor in the tax-relevant factors of bureaucracy costs, the distortion of the product market and the tax burden. Therefore, the tax rate reduction and the granting of special depreciations can make Germany more attractive. Another problem is organised crime. There are major problems, particularly in relation to money laundering.

3. special depreciation generally preferable over tax rate reduction

Special depreciation can be used by the state in particular to promote investment. This allows deficits to be compensated precisely, effectively and cost-effectively. Therefore, better investment incentives can be provided than a permanent reduction in corporate tax rates.

Special depreciations are currently granted, especially in the areas of climate protection and digitalisation. In this case, however, an inefficient use of the means is to be prevented. The special depreciation therefore serves solely to promote private investment. Therefore, only companies that also make subsidized investments benefit. In view of the still very favourable refinancing conditions of the public sector, the support is therefore more cost-effective than a permanent reduction in the rate of corporate taxation. In view of the objective of promoting investment in durable assets, special depreciation is thus much more effective than reducing corporate tax rates.

4th tax rate reduction

Companies can also be supported by lowering corporate tax rates. It is true that this will significantly benefit the companies in the long term. However, investments are not targeted. On the other hand, incentives can be provided for investments in which everyone participates. Therefore, a pure reduction of the corporate tax burden in Germany is not a suitable instrument for sustainable improvement of location attractiveness. Rather, it would be for companies and business to combine better special depreciation and tax rate reductions efficiently. However, a reduction in corporate tax rates is likely to put pressure on European competitors in particular and thus trigger another round in the tax cut race. This creates increasing wealth inequality and income inequality.