Klingbeil plans | Tax cuts: deadweight effects for companies

It's the new finance minister's first major initiative: The CDU/CSU-SPD federal cabinet approved a legislative package proposed by Lars Klingbeil at its meeting in Berlin on Wednesday. "We're now stimulating the economy with our investment booster," the SPD politician happily declared afterward. "In doing so, we're securing jobs and putting Germany back on a growth path."

The proposal, which is scheduled to be discussed in the Bundestag starting this Thursday, involves both short- and medium-term tax measures. Companies will be able to claim special depreciation allowances of up to 30 percent for investments in movable assets such as machinery between 2025 and 2027. Also planned are a more generous design of the research tax allowance and the introduction of another special depreciation allowance for the purchase of electric cars. If a company purchases an electric car, it will be able to deduct 75 percent of the costs from its taxes in the year of purchase. Finally, the plan is to reduce the corporate tax rate on profits in five steps from the current 15 percent to just 10 percent between 2028 and 2032.

Since the loss of tax revenue would impact the states and municipalities , the Bundesrat (Federal Council) must approve the plan. However, the states are far from entirely happy. "The billions in investment will simply evaporate if states and municipalities lose revenue in their core budgets," warned Saarland's SPD Minister-President Anke Rehlinger on the news portal T-Online. Her Thuringian colleague Mario Voigt (CDU) said: "An investment booster makes sense – but whoever orders must also pay." Furthermore, a fundamental solution is needed, rather than haggling over every decision.

Chancellor Friedrich Merz (CDU), who had made similar statements during his time in opposition, held out the prospect of new cooperation between the federal government, states, and municipalities at the German Local Government Congress on Wednesday, but without being specific. He preferred to speak of a "low-bureaucracy" distribution of funds from the €100 billion special fund for infrastructure. To ease the burden on the local level, Merz said, "a comprehensive spending review, including in social law," should be conducted. The state premiers would have liked to discuss these key issues with the Chancellor this Thursday – but the state leaders must deliberate alone, as Merz is meeting with the US President in Washington at the same time.

The sums involved are considerable, especially since the federal government is planning further measures that would also burden states and municipalities. According to official calculations, the current Klingbeil package alone is expected to result in revenue shortfalls of more than €48 billion by 2029 – €16.7 billion of which will go to the states and €13.5 billion to the most financially weak municipalities.

"With depreciation relief, not a single euro more will be invested and no additional demand will be created."

Heinz-J. Bontrup Economist

The chairman of the service workers' union Verdi, Frank Werneke, therefore warns that without adequate compensation, the "investment boost" could amount to a "financial death knell for many cities and municipalities." "That must not happen; therefore, the shortfall in revenue must be fully offset," said Werneke. Many municipalities are already on the verge of bankruptcy – with a total deficit of €24 billion last year alone, as well as cash advances for over-indebted municipalities totaling another €36 billion, the union representative calculates.

The government assumes that the tax cuts will prompt more growth in the near future, which will help with the counter-financing. In fact, the plan is unlikely to have much economic impact either: "With depreciation relief, not a single euro more will be invested and no additional demand will be created," criticizes economist Heinz-J. Bontrup in the "nd" newspaper. "Moreover, the tax effect only affects companies that make profits, and they don't need government gifts that lead to tax shortfalls." Klingbeil is thus causing "macroeconomic misallocations." Bontrup further criticizes the fact that no distinction is made between replacement and expansion investments. With replacement investments, however, depreciation relief results in "pure windfall effects."

For Bontrup, the planned corporate tax cut is "a social scandal" given the lack of a wealth tax and the country's high poverty rate. He calls it "pure corporate gifts that will ultimately only increase redistribution in favor of after-tax profits." Bontrup also sees discrimination, as the corporate tax only applies to corporations, while partnerships and sole proprietors are left empty-handed.

The Left Party, in turn, complains about the social imbalance in the plans. Party leader Ines Schwerdtner calls it a "wealth booster for the upper class," while the law proposed by Klingbeil would not reduce taxes for low- and middle-income earners at all. Schwerdtner criticizes that the tax relief for companies would primarily be "distributed to shareholders," and instead calls for tax relief for low- and middle-income earners, as this is the only way to boost domestic demand.