While Americans are anxiously awaiting full details of the tax bill now being finalized in Congress, German economists are warning that the changes sought by President Donald Trump mean that significant amounts of new investment and jobs will shift from Europe to the United States.
“The tax competition will have a new dimension,” said Christoph Spengel, chairman of the corporate tax department at the University of Mannheim. Mr. Spengel, who is also a research associate at the Center for European Economic Research, and a group of tax experts at the university have done a detailed comparison of the two countries’ tax systems and published a report under the heading, “Germany loses out in US tax reform.”
Clemens Fuest, who heads the Ifo economic think tank, also said he believed German business would suffer. “Investments and jobs will migrate to the US,” he said.
“Investments and jobs will migrate to the US”
But German companies that are already active in the US are enthusiastic about the changes. ”We see the tax reform very positively,” said Caroll Neubauer, who is CEO of B. Braun Medical Inc., a healthcare company whose US operations are based in Bethlehem, Pennsylvania. “Companies, also German companies, will invest money, but also in research and development,” said Mr. Neubauer, who is also head of the German-American Chamber of Commerce.
According to the Mannheim study, proposed reforms will decrease the effective US corporate tax burden from 36.5 per cent to 22.7 percent. This is lower than the effective tax rate in Germany, which it put at 28.2 percent, and close to the European average of 20.9 percent.
The study said the US cut “will also alter the incentives for international investment, with the US becoming an even more attractive investment location for European companies after the reform is implemented.”
In addition, the report said that European countries with low tax rates like Ireland will benefit from inward US investment, and higher tax countries like Germany will become less attractive to American investors.
“The tax reform in the US isn’t just going to stoke tax competition between the United States and Europe; competition between EU members for US investment is also going to intensify and Germany is going to lose out,” Mr. Spengel said in a statement.
The German study was based on tax changes that go beyond simply lowering the percentage of profits taxed. The US is proposing to adopt a territorial tax system, similar to the one used in Germany, in which companies mainly pay US taxes only on revenues earned in the US. Before this reform, US companies were taxed on their worldwide income.
In addition, the tax reform reportedly includes a change to the way capital investment such as machinery, but not buildings, are accounted for. Under current law, 50 percent of the investment can be deducted immediately and the rest has to be written off over a number of years. Now, all of the investment will be able to be deducted in the year in which it occurs, while Germany still spreads out the deduction over a period of years.
Gavin Ekins, a research economist at the Tax Foundation in Washington, argued that it is not only the tax rate that will make the US more attractive. He told Handelsblatt Global that in figuring out their “service cost,” a metric that measures the cost of capital, companies also have to consider local labor costs, regulatory burdens, and things like energy prices and the cost of land.The US has the advantage in almost every category, he noted, but until now firms were deterred by the high corporate tax.
“Now you get a windfall for having capital in the US, so that causes investors to invest,” Mr. Ekins says. The change in the capital investment rules gives US firms “a tremendous advantage,” he said. “It’s a pro-capital formation tax bill and this is why other countries are so wary about what the investment landscape will look like.”
Using direct investment figures from the period 2008-2012, the German specialists calculated that the value of German foreign direct investment in the US could rise by €39 billion with the tax reform. It said US direct investment in Germany would also rise, but by a much smaller amount: €6.3 billion.
Donata Riedel writes about economic policy for Handelsblatt, Katharina Kort is a New York correspondent for Handelsblatt and Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: firstname.lastname@example.org, email@example.com and firstname.lastname@example.org.