Germany lowers taxes to compete with Eastern Europe

April 13, 2005

Free Market Foundation

Recently, Germany proposed to cut its federal corporate tax rate in order to be competitive with its Central and Eastern European neighbours, reports the Wall Street Journal.

Just one year after lambasting Eastern Europe for its low tax regimes, German Chancellor Gerhard Schroder announced plans to reduce the federal corporate tax rate to 19 percent from 25 percent:

With the rate reduction, Germany’s combined national and local tax rates on corporate income would be 32 percent, close to the United Kingdom (30 percent) and the Netherlands (31.5 percent).

By contrast, Hungary, Poland and Slovakia all have combined rates under 20 percent; the United States has a combined rate of 39.4 percent.

Still, the move should be considered fairly modest, particularly in light of the intentions of Central and Eastern European countries to continue cutting tax rates:

Estonia plans to lower its rate from 24 percent to 20 percent to stay competitive.

In Poland, ahead of elections later this year, both major competing political parties are proposing flat taxes of 16-18 percent.

Romania, which will likely join the European Union in two years, adopted a 16 percent flat tax that took effect in January.

Lowering marginal taxes on corporate income may not be the whole answer to Germany’s economic woes (which includes an unemployment rate of 12.6 percent), but it will boost economic activity, tax compliance, and foreign investment, says the Journal.

Source: Editorial, Germany’s Epiphany, Wall Street Journal, March 22, 2005.

For text (subscription required): http://online.wsj.com/article/0,,SB111145673470385912-search,00.html

For more on International: Taxes: http://www.ncpa.org/iss/int/

FMF Policy Bulletin/ 04 April 2005