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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.

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