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Gerrit B. Koester, The influence of tax competition on tax policy – evidence from tax rates and tax burdens in:

Gerrit B. Koester

The political economy of tax reforms, page 93 - 96

An empirical analysis of new German data

1. Edition 2009, ISBN print: 978-3-8329-4131-4, ISBN online: 978-3-8452-1609-6 https://doi.org/10.5771/9783845216096

Series: Neue Studien zur Politischen Ökonomie, vol. 5

Bibliographic information
93 evidence of the influence of international tax competition on taxation.167 Even a superficial review of this literature is far beyond our scope. We are mainly curious, whether tax competition is directly reflected in tax policy decisions covered in our data-set and has to be included as an explanatory factor in our analysis. Therefore, we restrict ourselves to the question whether the strong increases of capital mobility have changed the pattern of tax policy by pushing the tax burden in corporate taxation down. If this would be the case, we should see a change in the pattern of tax policy (especially with respect to the taxation of capital) before and after the strong increase in capital mobility after 1986. We focus here on the influence of tax competition on corporate profit taxation within the corporate profit and the local trade tax. To analyze the influence of tax competition on German tax policy, we first shortly review the development of tax rates and tax burdens in business taxes in Germany and then move on to a discussion of the influence of tax competition on business tax reforms in our data-set. 1.2 The influence of tax competition on tax policy – evidence from tax rates and tax burdens Figure 43 shows the development of the federal corporate profit tax rate from 1980 to 2006 in Germany, the US, the OECD20168 and the EU15.169 After the strong cut in corporate tax rates in the 1986 tax reform act in the US, corporate tax rates in the EU15 showed a continuing downward trend and stood in 2006 on average 15 percentage points lower than in 1980. In Germany the reduction was even stronger as the very high rate of 56% in 1980 came down to a corporate tax rate of 25%170 in 2006.171 167 See for example Feld (2000), Haufler (2001), Stewart/Webb (2006), Auerbach (2006) and Devereux et al. (2002). 168 The EU15 plus Australia, Canada, Japan, Norway and the USA. 169 For reasons of international comparison we have excluded the local trade tax rate (set individually by the municipalities) which increases the tax burden on corporate profits. Furthermore, the changes in the corporate profit tax rate were by far stronger and more important than the changes in the local trade tax rate. 170 Excluding the solidarity surcharge. 171 However, this should not be mistaken as an indicator for a comparatively low taxation of business profits in Germany. Together with the local trade tax, the effective tax burden on corporate profits was with 38.6% in 2006 still very high in international comparison. 94 20 25 30 35 40 45 50 55 60 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 Germany United States (Federal level only) EU 15 AVG OECD 20 AVG CORPORATE TAX RATES 1980-2006 Data Source: OECD, World tax database; Federal Ministry of Finance. % Figure 43: Corporate tax rates – international development 1980-2006 At first sight, the development of corporate profit tax rates seems to support the predictions of a “race to the bottom”.172 But tax rates alone have only limited informational value as tax base changes are not included. How does the situation change if we take a look at changes of the tax burden? Figure 44 shows the development of effective tax rates which we have calculated based on national accounts data with a methodology similar to that one established by Mendoza et al. (1994).173 172 For an discussion of international developments in corporate income taxation see Devereux et al. (2002). 173 We have calculated effective tax rates based on tax revenue statistics and national accounts from the Federal Statistical Office. We have corrected wage and income tax statistics (see footnote 95). In contrast to e.g. Mendoza et al. (1994), we have excluded social security contributions and have counted all property taxes as taxes on capital. 95 EFFECTIVE TAX RATES GERMANY 1950-2005 Source: Own calculations based on data from the Federal Statistical Office. For details see text. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 19 51 19 53 19 55 19 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 Capital and Entrepreneurship Consumption Dependant labour Effective tax rates Figure 44: Effective tax rates in Germany based on national accounts data We see that the effective tax rates on income from capital and entrepreneurship increased strongly until 1982. Afterwards, the tax burden on dependent labor grew slowly further, while the tax burden on income from capital and entrepreneurship was strongly reduced before a renewed and only transitory upward trend starting at the end of the 1990s. Effective tax rates on consumption were very stable throughout 1950 to 2005. Especially the reduction of the effective tax burden on income from capital and entrepreneurship from 1982 to the late 1990s is often seen as an indication for the effects of international tax competition although business profit developments and reunification effects might have had a strong effect as well. Based on revenue data however, which include both economic developments and tax policy effects, this is hard to decide.174 Therefore, we move on to a discussion of tax reforms. 174 International comparative studies find only very limited evidence for a reduction of the tax burden on corporations as a consequence of international tax competition. See Haufler (2001), Slemrod (2004), Fuest et al. (2003), Mendoza et al. (2005), Stewart/Webb (2006) and Auerbach (2006). 96 1.3 The influence of tax competition on tax policy One main advantage of our data-set is that we can study tax policy outcomes directly and do not have to rely on nominal tax rates or revenue developments. Do we see an effect of increased capital mobility and tax competition especially on business taxes after 1986? -0,5% -0,4% -0,3% -0,2% -0,1% 0,0% 0,1% 0,2% 0,3% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 INCR/GDP RED/GDP BUSINESS TAX REFORMS, 1964-2004 CORPORATE PROFIT TAX -0,2% -0,1% 0,0% 0,1% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 INCR/GDP RED/GDP LOCAL TRADE TAX Increase of tax exemption level Abolishment payroll tax Reduction of included long-term interest Abolishment of trade capital tax Reduction of tax rates for small businesses Tax rate cut to 25% Tax rate cut to 45% Tax rate cut to 50% Reduction of tax exemptions in banking Tax rate cut to 40% Fi sc al e ffe ct s ta x re fo rm s/ G D P Fi sc al e ffe ct s ta x re fo rm s/ G D P Temporary rate increase to 26.5% Own calculations based on: Federal Ministry of Finance (2004)/Tax laws.Reforms by date of implementation. Figure 45: Tax competition and business tax reforms Figure 45 shows the fiscal effects of reforms in the most important business taxes: the corporate profit and the local trade tax. We see that reform activity was generally not so frequent in corporate profit taxes. While there were major tax reductions until 1982, especially the rate cuts from 1991 and 1994 led to substantial reductions of the tax burden. The most important corporate tax reforms (with respect to fiscal effects) were the strong rate cuts in 1999 and 2001. The increased importance of tax reductions from the 1990s on can be seen as an indicator for an important influence of tax competition on tax rates. If we compare the periods before and after 1986 (when the US cut corporate tax rates strongly), we find that the average annual fiscal effects of tax reductions in corporate taxation from 1987 to 2004 were 11.6 times higher than the average annual fiscal effects of tax reductions from 1965 to 1986. With respect to corporate taxation, the

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Zusammenfassung

Was bestimmt die Steuerpolitik? Welche Ziele verfolgen die Bundesregierungen bei Steuerreformen? Haben Steuererhöhungen und Steuersenkungen einen Einfluss auf die Wahlergebnisse? Auf der Basis eines neuen Datensatzes zu den fiskalischen Effekten von Steuerreformen im Zeitraum von 1964 bis 2004 zeigt das Werk Muster der Steuerpolitik auf und testet zentrale ökonomische Hypothesen. Dabei zeigt sich, dass normative ökonomische Ansätze kaum einen Erklärungsbeitrag für die zu beobachtende Steuerpolitik leisten können.

Ausgehend von wichtigen polit-ökonomischen Theorien zeigt der Autor, dass die Mehrheitskonstellationen im Bundesrat einen wichtigen Einfluss auf die Steuerpolitik haben, allerdings genau umgekehrt wie von der Blockade-Hypothese behauptet: Steuerreformen sind gemessen an ihren Fiskaleffekten bei gegenläufigen Mehrheiten in Bundestag und Bundesrat häufiger und umfangreicher. Des Weiteren gibt es keine Hinweise darauf, dass die parteipolitische Zusammensetzung der Bundesregierung einen wichtigen Einfluss auf Steuerreformen hat. Wahltaktische Terminierungen von Steuerreformen spielen aber sehr wohl eine wichtige Rolle. Eine Auswertung des Zusammenhangs von Steuerreformen und Wahlergebnissen zeigt allerdings, dass die Versuche der Bundesregierungen, ihre Wiederwahlwahrscheinlichkeit durch Steuersenkungen kurz vor der Wahl zu erhöhen, wenig erfolgreich sind: Nicht nur die Jahre unmittelbar vor den Wahlterminen, sondern die Steuerpolitik in der gesamten Legislaturperiode hat einen Einfluss auf die Bundestagswahlergebnisse der regierenden Parteien.