The Tax System—the Major Reason for Germany's High Unemployment

One major reason for Germany’s high unemployment and the evident weakness of business investment is the nature of the tax system, which tends to discourage both individual effort and investment. Nominal corporate tax rates are, in fact, very high and it is these rates that potential investors primarily look at. However, the actual burden borne by companies is not as great as it might seem, because the tax base is fairly narrow. This combination in itself tends to encourage tax Links Of London Bracelets avoidance at both the personal and corporate levels. Moreover, by international standards, firms in Germany are still taxed quite heavily,

A reform of corporate taxation, therefore, should start by reducing tax rates, cutting subsidies and broadening the taxable base. The resulting positive impact on growth would be reinforced if there were also a substantial easing of the net burden.

How do the current plans for a reform of corporate taxation measure up to these goals? The overall tax burden on companies is to be brought down significantly, with the ceiling of 35% being set. To this end, a dramatic reduction in the corporate tax on retained earnings is planned. The related drop in revenues is to be offset by changes in the rules governing tax breaks.

An approach incorporating these basic features would be a welcome step. If realized in its present form, it should ensure that the objective of making tax rates more attractive for businesses is achieved. At the same time, however, it would be unfortunate if an excessive broadening of the taxable base made it impossible to attain the equally important goal of providing relief.

Comprehensive tax reform is needed in Germany to spur investment and to create new jobs, thus putting the economy on a higher Links Of London Frendship Bracelets growth path. The drop in revenues caused by the tax relief granted to both companies and households would, in time, be at least partially offset by the larger volume of tax receipts produced by economic growth. The gaps that remained should primarily be closed through spending cuts. If measure of this sort proved inadequate, then, as a last resort, an increase in indirect taxes could perhaps be considered.