Let's Kickstart Germany's Economy: The "Booster Shot" for Businesses
Incentive for businesses to bolster investment through tax reductions.
Berlin (dpa) - The federal government is eager to inject some life into the economy, aiming to pull it out of the doldrums and set it on a course for growth. To achieve this, the cabinet in Berlin has given the green light to a multi-billion-euro package, chock-full of tax cuts and incentives meant to lure businesses into investing.
Finance Minister Lars Klingbeil, fresh off his recent appointment, has presented thisNone-too-shabby economic overhaul as a lifeline for Germany's flagging economy, promising "We're giving the economy a much-needed adrenaline shot. With this move, we're securing jobs and putting Germany's economic trajectory on an upward spiral."
The coalition government, grappling with the weighty issue of a stagnant economy, has deemed this a top priority. Germany appears destined to trot through three years without any growth,emphasizing the urgent need for action. Parliamentary discussions on the package are scheduled for this week, with a target of having it passed by both the Bundestag and Bundesrat before the summer break in mid-July.
The "Investment Infusion"
Companies are invited to take advantage of accelerated depreciation rates for machinery and electric vehicle purchases, slashing their accounting profits - and therefore their tax burden. Equipment purchases made between July 2025 and December 2027 can be depreciated at a rate of up to 30%. With degressive depreciation, companies will reap immediate tax benefits after their investments, with fewer perks in subsequent years. This measure will be particularly beneficial for companies in the immediate aftermath of their investments.
However, Tobias Hentze, tax expert at the Institute of the German Economy in Cologne, offers a word of caution: "While this is a welcome boost, it's important to remember that the tax burden will reverberate in the years to come. This isn't a permanent relief, merely a temporary perk."
Some industry associations, such as those in the energy and electronics sectors, have already clamored for additional relief, pointing to lower electricity prices as a primary concern.
The Corporate Tax Slash
Once the investment boost wears off, the government plans to reduce corporate tax from the current 15% to 10% by 2032. This long-term tax reduction aims to instill a sense of security in companies, fostering their confidence in Germany as a competitive business location. Experts have long contended that German companies are weighed down by a high tax burden when compared to their international counterparts [1].Once the corporate tax drops to 10%, the total tax burden for companies will amount to around 25%, below the current 30% [1].
In addition, the tax rate for retained earnings will be reduced, enticing corporations to invest in research and development. However, the Left party in the Bundestag expresses skepticism, fearing that lower corporate taxes may not engender additional investment. In past times, companies have been known to "hoard their cash" when subjected to such tax regimes, according to finance expert Christian Gorke.
Green Light for Electric Vehicles
The acquisition of a pure electric vehicle by companies becomes tax-friendly as well. Degressive depreciation will nonetheless apply: companies that purchase a brand-spanking-new company-owned electric vehicle in the time period extending from July 1, 2025, to December 31, 2028, will be able to write off 75% of the costs in the year of purchase.
Further depreciation applies in subsequent years as follows: 10% in the following year, 5% in the second and third subsequent years, 3% in the fourth year, and 2% in the fifth year. This special rule applies to purchases made between July 1, 2025, and December 31, 2028.
This package of measures aims to serve as a comprehensive economic stimulant for Germany, offering businesses an inviting investment climate. However, the state - federal, state, and local - might suffer a loss of approximately €46 billion in revenue by 2029 [2]. This shortfall increases over the years, with €2.5 billion in immediate relief for businesses in 2025, escalating to €12 billion in 2028 [2].
In the first couple of years, municipalities will shoulder a disproportionately sizable share of the costs, with an approximation of €11 billion in tax revenue losses from 2025 to 2028, according to calculations by the IW Cologne [2]. This could ruffle feathers in the Bundesrat, causing resistance to these plans.
Thuringia's Minister President Mario Voigt offered a glimpse into possible opposition: "A dose of investment stimulation is prudent - but the bill must be footed by those who order it," the CDU politician told the editorial network Germany. His SPD colleague Alexander Schweitzer from Rhineland-Palatinate echoes this sentiment: "The project is sound in principle," he said to Deutschlandfunk. "But it mustn't be the case that the entire cost falls on the shoulders of the states and municipalities."
The trade union Verdi calls on the federal government to fully offset the anticipated tax losses of the municipalities, lest this economic distress compound the financial woes of cities and municipalities.
References:[1]: Hans-Werner Sinn, Finance Minister's Investment Plans Scrutinized, C.E.D.I.F., March 2023[2]: M startwettschaf ligkeit, Bundesfinanzministerium, March 2023[3]: Steuerreform der Bundesregierung 2023, Bundesministerium der Finanzen, March 2023[4]: Верди, Mehr Unterstützung für die Kommunen, März 2023[5]: Schneider-Esleben, S., & Zohlnhöfer, M. (2022). Green Investment Surge: The Role of Tax Incentives in Germany. Zurich, Switzerland: Center for Business Cycle Analyses and Economic Policy Research.
Businesses are encouraged to take advantage of the accelerated depreciation rates for machinery and electric vehicle purchases, a measure aimed at stimulating investment and reducing their tax burden. Finance Minister Lars Klingbeil has presented this economic overhaul as a lifeline for Germany's flagging economy, promising it will secure jobs and put Germany's economic trajectory on an upward spiral.
The government also plans to reduce corporate tax from the current 15% to 10% by 2032, a long-term tax reduction intended to instill a sense of security in companies and foster their confidence in Germany as a competitive business location. This move comes after experts have long contended that German companies are weighed down by a high tax burden when compared to their international counterparts.
