Another German tax reform (perhaps)

05/05/2005

Not everything in the world revolves round today’s British election. In Germany they are still trying to figure out how to salvage their economy. And they have come up with another tax reform, this one aimed at small businesses that were closing down or, worse from the government’s point of view, moving out of Germany, because of the destrcutive inheritance tax.

Accroding to today’s Daily Telegraph, the German cabinet has approved plans to abolish inheritance tax for small family owned firms and to cut corporate tax rate from 25 to 19 per cent, bringing Germany’s combined federal, regional and local tax rate for businesses down to 32 per cent, nearer to the EU average.

“Searching for new ways to lift Germany out of the worst slump since the 1930s, finance minister Hans Eichel said small and medium-sized family firms could be handed down to heirs free of tax - provided they keep operations going for ten years.

The concession is limited to firms worth less than €100m (£68m). The tax rate is to be tapered down by one tenth each year.”

The reform, particularly that of the corporate tax rate is said to be prompted by stiff competition from the East European countries, many of whom have gone for low corporate taxes (though sometimes for high other ones).

More to the point, a number of them have introduced or are thinking of introducing a flat rate tax that is much more likely to encourage growth, deter evasion and simplify tax paying for most of the victims.

After all, one does not have to be an economist on the Milton Friedman level to see what is wrong with the German proposal to create special deals for small family owned firms (a proposal that crops up periodically in this country as well).

It adds another level of complication and another level of bureaucracy; it acts as a disincentive for firms that might like to grow or expand their ownership; and, above all, it encourages further and more complex evasion strategies.