No role model

Tax reform à la Trump would be the wrong way for Europe

Christian Kullmann
Finding the right response to solo actions across the pond. Source: dpa

Nobody has to like Donald Trump or approve of his political actions. His ideas of isolation, national unilateralism and custom walls are not blueprints for solving global problems of our time.

On the contrary, the ruthless rhetoric of the US president seems to exacerbate some conflicts even further. His country’s relationship with China, for example, has already suffered greatly under the vocal threats of billions of tariff hurdles. It’s clear that in a trade war, all sides can only lose.

But despite the backward-looking ideology that shows through in Trump’s agenda, one has to take his political actions seriously. Because they have consequences for the whole world.

Trump is an entrepreneur, and he has done exactly what makes many entrepreneurs happy: he has radically lowered taxes. For companies, the tax burden falls nationwide from 35 to 21 percent. If one adds the different burdens in the individual US states, an average of 25 percent tax is due. That’s 13 percentage points less than before.

One can argue about the timing in the midst of the economic boom and the long-term consequences because the debt burden of the United States increases massively. But Trump sets standards, and the world reacts because it has to respond. China, as the second-largest economy, has immediately announced tax relief for investments. Other countries will follow.

“Golden times for companies? A clear no.”

Christian Kullmann, Evonik, CEO

Golden times for companies? A clear no. First, it is questionable how long the low tax rates can be sustained economically. The debt spiral cannot extend to infinity at the national level. The US government bears responsibility for coming generations.

Secondly, while low tax rates directly favor corporate investment, in the end, market opportunities determine lasting success. It is hardly possible to strategically build upon favorable fiscal conditions because they can change rapidly according to the budgetary situation and governmental set-up.

Last but not least, there are already negative side effects associated with Trump’s drastic measures. In pithy words, the president announces import taxes on foreign products.

The strong wealth motor that free trade represents for large parts of the world is simply ignored in such plans. The tariffs for the transatlantic exchange of goods are, thanks to years of approximation, on average at two percent. The trade between North America and Germany particularly benefited from this. Only a few exceptional products reflect the protectionism of ancient times. Now, a 25 percent tax rate will be due on steel imports, for example.

How should Europe and Germany behave? To put it clearly: Neither setting up new customs barriers at the external borders of the EU nor Germany joining an international tax dumping race would be the right answer. The EU relies on free trade and can not counter bad policies with bad measures.

In Germany, the focus on consolidating public finances after decades of lack of restraint has just reached a real political significance. This must not be sacrificed carelessly now in the long-term interest.

Instead of getting involved in undercutting competitions with America and Asia on corporate taxes, Europe should align the tax rates within the EU. Politically closely linked EU states continue to fight each other with fiscal means. Twenty-five years after the creation of the single market, the tax landscape in Europe still resembles the small-scale patchwork quilt from prewar times. An approximation of corporate taxes at this level would benefit many cross-border companies by eliminating the administrative burden.

Harmonization should not be based on Irish dumping rates or on the highest bidder. France is making progress under President Macron, cutting its corporate tax rate from 33 percent to 25 percent. This is an exemplary response to solo actions across the Atlantic: driving the integration of the European Economic Area forward while strengthening the competitiveness of companies within that area.

Christian Kullmann is the CEO of Evonik Industries. The specialty chemicals maker generates more than 20 percent of its sales in the US. To contact the author: columnist@handelsblattgroup.com

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