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FINANCE TOP STORIES

The corporate tax must be reformed

German capital stock

The German capital stock is shrinking. On the one hand, this is due to declining investments by companies. A corporate tax reform could help.

Germany urgently needs a private and public investment initiative. Since the mid-1990s, Germany’s capital stock has developed only very weak. While it has grown by almost 70 percent in the US and more than 45 percent in the entire European Union, it has not risen by as much as 30 percent in Germany. If one compares the development of the capital stock in the 28 EU states since 1995, Germany is thus on the penultimate place.

One reason lies in the years of investment weakness of German companies. Since the turn of the millennium, the level of gross investment in German industry has been consistently below that of France and Italy. In 2016, just 19 percent of gross value added was entrepreneurial value added, compared with over 25 percent in France and around 24 percent in Italy.

Looking at investments in intangible goods, for example in software and patents, the picture in Germany is similarly sobering. German investment is at the level of Italy and well below that of the US and France.

The weakness of private investment is stagnant public investment. The investment boom, especially in the construction sector, in the post-reunification years, has been reversed since 2003, and things are bleak, especially in municipal investment.

If depreciation is also included in the calculation, then one must say that the investments of the public-sector straight are sufficient to offset the value of depreciation. Since the mid-2000s, therefore, the public capital stock has lost a total of seven billion euros in value. Investment in the future of Germany, as so often propagated by politics, looks different.

The same data also shows that education, housing and the military, where politics has been improving for years, are doing nothing. For example, investment in education, which is mainly the responsibility of the state governments for the universities and the municipalities for the schools, has been declining or at best stagnant for 20 years.

Weak wage development

This investment weakness is now a real threat to the long-term prosperity and future of Germany as a business location. Weak investment is accompanied by rising net entrepreneurial savings and weak wage development.

Thus, the factor of labor can not be better remunerated if it has to work with old and unproductive capital. For example, a schoolteacher who has to work with an outdated operating system or outdated software faces problems such as incompatibilities, which cost time that is lacking elsewhere. Craftsmen who are stuck in traffic due to poor bridges lose important working hours and lose productivity. Accordingly, their wages can not rise too much.

Weak investment is also associated with excessive export surpluses, a strategic weakness at a time when an American president is aggressively calling international trade agreements into question. It is quite possible that the US will escalate the trade war.

And the World Trade Organization (WTO) may soon be unable to enforce rules for free world trade in key markets. In such a situation, weak domestic demand and weak investment will be the Achilles heel of the German economy, as it is currently very dependent on exports.

It is therefore time to seriously consider domestic investment. What can and should the new federal government do to tackle Germany’s investment weakness? It is often said in the German debate that the weak euro is putting companies under pressure to invest more and increase their productivity. After all, with the weak euro exchange rate, you can export a lot without substantial investment.

But the euro is also so weak because so little is being invested in Germany, wages have developed so poorly and the ECB is therefore trying to increase inflation with a particularly expansive monetary policy. Here the cat bites its tail.

Both because of the international context and because of the objective need, it should be in the interest of the Federal Government to release the domestic investment and growth forces. There are a number of instruments that could provide good results at relatively low fiscal costs.

More incentives are necessary

First, one should improve the incentives for companies to invest again in Germany. For this purpose one should massively improve depreciation possibilities on capital, software and research investments.

So it is not primarily about lowering the corporate tax rate, which would be politically very unpopular and would also cause negative reactions to European neighbors, but rather a targeted measure to reduce the marginal cost of investment.

This step is all the more necessary as the recent corporate tax reform in the United States has introduced an immediate one-hundred percent writedown on capital investment. Even a radical simplification of German corporate tax law would be effective, even if politically controversial.

In addition to the tax concession on business investment, it is also about improving the general framework for private investment. For years, the OECD and the IMF have regularly pointed out that, in particular, the market entry conditions in the service sector can be improved.

For example, some freelance and other services could check the effectiveness of the high number of existing regulations and regulations. These measures would increase incentives for private business investment, but cost the state relatively little money. They could release growth forces, which in the medium term should in turn lead to higher tax revenues.

In addition to private investment, the new federal government must also ensure more public investment. It is important to accelerate public infrastructure significantly faster and to increase public spending on research and development. Although the coalition agreement points in the right direction, it does not seem brave enough.

Of course, broadband expansion for fast Internet is an absolute necessity for the future viability of the German economy and society – but this expansion should have been implemented five years ago. Various international comparisons show impressively that Germany is at best in the middle of the field of digital infrastructure, if not already suspended.

Top researchers are missing

If there is no ambitious expansion of public and private investment, the situation will not change fundamentally. What is certain, however, is that without a fast and reliable Internet infrastructure, Germany will not remain competitive in the development of new digital technologies.

It is essential that Germany does not lose touch with future technologies such as artificial intelligence. A recent wake-up call from top scientists once again makes it very clear that Europe and Germany, in terms of machine learning and artificial intelligence, are now facing massive difficulties in holding top researchers. Without a substantial increase in public funding for research and development, Europe will not be able to maintain cutting-edge research in future technologies.

Overall, a broad strengthening of private and public investment will also help to increase wage levels in Germany. Therefore, not only the German economy will benefit in the long term, but also the employees. Germany undoubtedly has the financial capacity to initiate a turnaround towards more investment – but the political will seems to be lacking.

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