The Growth Opportunities Act provides for tax relief and incentives for innovation in order to support companies in the face of increased competition between locations, multiple crises and high energy prices. Regardless of the pending political agreement, researchers from the University of Göttingen and the KU have analyzed the potential effects of various tax measures to promote investment: To what extent would corporate investment activity be stimulated by tax rate reductions, depreciation allowances and investment premiums? What would the consequences be for tax authorities?
The German Federal Government passed the bill last November. Among other things, the Growth Opportunities Act provides for tax incentives for investments in climate protection with the help of an investment premium and accelerated depreciation of company buildings and movable fixed assets. After the CDU/CSU-led federal states had so far refused to approve the law, the mediation committee drew up a compromise proposal this week, according to which some of the previously announced reliefs will not be implemented or will only be implemented for a limited period of time. In order to fully realize the original concept, one side proposed financing via a "special fund". Others are calling for the abolition of the remaining solidarity surcharge – i.e. a reduction in tax rates – and savings elsewhere.
Tax experts from the Georg August University of Göttingen and the Catholic University of Eichstätt-Ingolstadt have now analyzed the tax effects that such tax relief measures would have both for companies and for the tax authorities. Their investigation focused on the effects of tax rate reductions, accelerated depreciation and investment premiums that would be introduced as part of the law.
Prof. Dr. Reinald Koch (KU, left) and Prof. Dr. Andreas Oestreicher (University of Göttingen)
"Our calculations show that the tax relief associated with a five percent reduction in the tax rate by far exceeds the relief resulting from the introduction of declining balance depreciation or an investment premium", says Prof. Dr. Reinald Koch, holder of the Chair of Business Taxation at the KU Ingolstadt School of Management. This would reduce tax revenue accordingly. At the same time, the effect of a tax rate reduction on investment activities is comparatively low, as tax rate reductions have less of an impact on the cost of capital – unlike targeted depreciation allowances and investment premiums.
From their analysis, the tax experts conclude that a reduction in the tax rate is the method of choice, particularly for profitable corporations, if they intend to improve their international competitiveness with regard to the tax burden on corporate profits. If, on the other hand, the aim was to promote investment in Germany, the introduction of declining balance depreciation or an investment premium would be more effective. However, the investment premium also favors those companies that are unable to generate higher depreciation amounts, or that generate losses or carry them forward.
The economists also point out that investment premiums that go significantly beyond the cash value benefit of introducing declining balance depreciation, as provided for in the Growth Opportunities Act for climate protection investments, reduce and relieve the cost of capital to a greater extent – and thus also lead to higher losses in tax revenue per euro invested. However, the experts point out that there is a lack of empirical evidence for the investment effect of large changes in the tax term of the cost of capital.
According to Prof. Dr. Andreas Oestreicher, who heads the Department of German and International Taxation at the University of Göttingen, the results of the study were based on the complex mechanisms of tax incentive systems and demonstrated their opportunities for investment and growth in Germany. At the same time, the costs for the tax authorities would be determined, "which pay off all the more in view of greater stimulation of investment and growth". These insights highlight the need to consider the impact of such measures on promoting investment and securing tax revenue at the same time. In the case of the Growth Opportunities Act, it is therefore important to carefully weigh up the fiscal and investment effects.
Matti Boie-Wegener / Reinald Koch / Andreas Oestreicher / Lena Schön: Die fiskalische Wirkung von Steuersatzsenkungen, Abschreibungsvergünstigungen und Investitionsprämien in Krisenzeiten – Eine quantitative Analyse in Bezug auf deutsche Kapitalgesellschaften. ZEW Discussion Papers Nr. 24-008 – 02/2024. https://www.zew.de/publikationen/zew-discussion-papers
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