TAX CUTS

Berlin Weighs Response to Trump Tax Plan

European Finance Ministers Attend Eurogroup Meeting As Greece Bailout Deadline Looms
Finance Minister Wolfgang Schäuble is under pressure to respond to President Donald Trump's tax plan. Picture source: Bloomberg.

US President Donald Trump’s tax plan has put the German finance ministry on the defensive. Policymakers are concerned that his proposal to slash US business taxes by a whopping 20 percentage points, cutting the top rate to 15 percent, will put Germany at a competitive disadvantage.

When US state taxes are included, the top rate under Mr. Trump’s plan might add up closer to 25 percent, but that’s still lower than Germany’s top rate of 30 percent. The BDI, the main German industry lobby, estimates that US businesses would receive $240 billion (€259 billion) in tax relief.

Arthur Laffler, an economist and former advisor to US President Ronald Reagan, said OECD countries, including Germany, have “made a concerted effort to reduce corporate taxes below US levels” for years. As a result, US companies have moved overseas to take advantage of lower rates.

The Trump administration’s plan would turn the tables and lower US corporate taxes below the current OECD levels, Mr. Laffer said. This would give not just American, but also foreign companies, an incentive to move to the United States.

Indeed, Berlin is concerned that the US might look more attractive to German companies under Mr. Trump’s tax plan. Finance Minister Wolfgang Schäuble has made clear that Germany must remain competitive, and his ministry has already started drafting measures to counter the White House plan. Under one proposal, German businesses could receive billions in tax write-offs for R&D spending.

However, for political reasons Berlin’s options are limited. A race to the bottom on taxes would undermine Germany’s reputation as a staunch advocate for a crackdown on international tax havens. Both the center-left Social Democratic Party (SPD) and the center-right Christian Democratic Union (CDU) support this position.

“Similar tax plans under Reagan in the 1980s show that tax cuts for companies and wealthy individuals benefit the few at the cost of the majority.”

Marcel Fratzscher, President, German Institute of Economic Research

Germany is also in the middle of an election year, and tax breaks for corporations are not exactly popular with voters, in the wake of numerous high profile tax evasion cases. Martin Schulz, the SPD’s chancellor candidate, has sought to appeal to the middle and working class with a focus on economic justice and income inequality.

Chancellor Angela Merkel’s CDU wants to implement corporate tax reform, but the party is waiting until after the election to make a push: “We are still talking about the issue only as a side note,” a senior CDU official told Handelsblatt.

Given these realities, Berlin cannot top Mr. Trump on tax cuts. German officials can do little other than quietly hope that his tax plan collapses under its own weight. They may well get their wish – the plan has met with fierce resistance in Washington. Democrats have attacked the plan as a giveaway to the rich, while Republican fiscal conservatives are concerned that the tax cuts will increase the deficit.

Mr. Laffer said Mr. Trump’s plan will stimulate economic growth, boost tax revenue and pay for itself over the long run. But Marcel Fratzscher, president of the German Institute for Economic Research, disagrees. He said the tax cuts would amount to little more than a flash in the pan for the economy.

“We already know from similar tax plans under US President Ronald Reagan in the 1980s that tax cuts for companies and wealthy individuals do not add up, but instead benefit the few at the cost of the majority,” Mr. Fratzscher told Handelsblatt.

The Trump administration argues the tax plan will lift all boats by stimulating economic growth to 3 percent. But to plug the deficit created by the tax cuts, the US economy would have to grow by 4.5 percent, an unrealistic figure in a mature economy.

Karen Dynan, an economist with the Peterson Institute for International Economics, said the tax cuts might accelerate growth by a few tenths of a percentage point, but a long-term boost is unlikely. The US economy is already near full employment, and the Federal Reserve would likely react to the tax plan by hiking interest rates to keep inflation in check, which would dampen growth, Ms. Dynan said.

With opposition to Mr. Trump’s tax policies coming from all sides, officials in Berlin can rest somewhat easier knowing that the plan faces an uphill battle in Washington.

 

Martin Greive is a correspondent for Handelsblatt based in Berlin. Moritz Koch has been the Washington correspondent for Handelsblatt since 2013. Torsten Riecke is Handelsblatt’s international correspondent. To contact the authors: riecke@handelsblatt.com , koch@handelsblatt.com , greive@handelsblatt.com

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