Economic transformation called for by Klingbeil

Revamped Perspective on Klingbeil's Investment Boost: Stirring Up Expansion, Doubts Loom

The People's Enthusiasm Over Economic Transformation

Facebook Twitter Whatsapp Email Print Copy Link Bind Companies to Germany and Attract New Investments: That's What Federal Finance Minister Lars Klingbeil aspires with His Bill Package - And Also Promote Electric Cars. The Economy Asks Cautiously for More.

Germany's freshly-minted Finance Minister, Lars Klingbeil, dreams big, promising to rebrand his department as an "Investment Ministry." Only four weeks since the formation of the federal government, Klingbeil is presenting his prized tax package, intended to breathe new life into the economy. But questions abound—both on the effectiveness of the plan and its passage through the Bundesrat.

At the heart of the plan are four ambitious strategies designed to incite growth:

super deductions
a phased reduction of Germany's corporate tax rate from 30 to 25%
near-total write-offs for electric vehicles purchased by companies
a tax incentive for research expenses

While the reduction in the corporate tax rate won't commence until 2028, the other strategies are set to spring into action as soon as possible, benefiting primarily businesses with solid earnings or an investing appetite.

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Yet, the lower tax burden for corporations translates into sizable double-digit billion-dollar losses in revenue for the federal government, states, and municipalities—totaling an estimated 46 billion euros by 2029, according to the Finance Ministry's calculations. The exact figure is, however, malleable—depending on whether companies make full use of the new opportunities, as expected by the ministry.

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The "super deductions" primarily serve as a prodding force for companies to invest more within Germany, particularly the contracting industrial sector. The new law permits companies to write off a more considerable percentage of their acquisition costs against the corporate tax due during the specified period. By keeping more profit or reducing the overall acquisition cost, companies stand to enjoy a better financial stance for the future, potentially staying put in Germany when making investment decisions. Klingbeil deems the reduced tax burden for companies a social democratic policy.

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Katharina Beck, Financial Policy Spokeswoman for the Greens, voices opposition, arguing that the law's "social bias" is unexpected from a Social Democratic finance minister. The revenue shortfall already weighs on financially strapped municipalities, adversely affecting local residents. Beck contends that depreciation benefits only companies with profits to show—those without taxable profits cannot claim depreciation.

Companies Urge for Tax Cuts

Yet, reducing the corporation tax rate also benefits companies already profiting handsomely in Germany, with no thoughts of leaving. Smaller businesses, in particular, are stuck in the shadows, facing sky-high bureaucracy, and climbing labor costs.

The Industry Chimes In

The response from the business world is mixed. Tobias Hentze, tax expert at the Cologne Institute of Economic Research, asserts, "Degressive depreciation works because it sets clear incentives for earlier and higher investments. But: It remains a temporary effect." The Industry and Commerce Chamber (DIHK) covets additional, lower energy prices, lower tax rates, and less bureaucracy, prioritizing those over the proposed depreciation, stating that it alone won't swiftly turn the tide for the economy.

DIHK President Helena Melnikov deems the gradual reduction of the income tax rate more critical than depreciation—scheduled to decrease annually by one percentage point from 30 to 25 percent, starting in 2028. Tax expert Hentze advises accelerating this measure, but Klingbeil may lack the funds, despite the government's €500 billion debt package offering more room for investment.

However, there is a pressing need for state investments to coincide with rising military spending. Klingbeil plans to present the establishment law for the debt package and the draft budget for the current year to the cabinet by the end of June. The states will then learn the timeline and amount of funds they can expect from the special fund—and their input is vital now.

States Demand Compensation

Klingbeil's investment booster needs the Bundesrat's approval, in addition to the Bundestag, due to the expected revenue shortfall for the states. The bill could sail through if the parliaments collaborate before the parliamentary summer recess. However, there's criticism and resistance from the states—16 billion euros less for the states and 11 billion euros less for the municipalities are substantial amounts. With Thuringia expecting to lose half a billion euros over five years due to Klingbeil's tax cuts, a significant chunk for a budget with predicted 2025 expenditures of 13.5 billion euros.

Klingbeil counters that the budgets of states and municipalities benefit from an improving economy. He points to the expanded scope of the federal states through their share of €100 billion in the federal government's special debt package and new debt rules for the states. A similar dispute arises currently regarding the increase in the commuter allowance—a cost the states demand the federal government pay. Thus, the financial tug-of-war is likely to dominate the minister-presidents' conference once again. "There is no fundamental disagreement with the states on the direction of this bill," said Klingbeil, expressing optimism about the Bundesrat as well. Although Klingbeil does not rule out that the federal government will compensate states to secure approval in the Bundesrat, his trump card: Even minister-presidents of the Union and SPD have an interest in a successful start for the new federal government and a reviving economy.

Doubts About the Electric Vehicle Subsidy

Klingbeil also seeks to bolster confidence in the area of electromobility. Two-thirds of newly registered commercial vehicles stand to benefit from the planned tax breaks. Self-employed individuals and companies will be able to write off up to 75% of the new cost of up to 100,000 euros for electric vehicles—thereby also reducing their tax burden. The catch: Most commercially registered vehicles are leased, not owned. Consequently, the special depreciation for electric vehicles would help only a limited number of companies, not the broader market. The Federal Association of German Leasing Companies (BDL) deems it "incomprehensible" that the new federal government leaves leasing out of subsidy discussions.

Enrichment Data:

The proposed tax package by Finance Minister Lars Klingbeil, part of Germany's "growth booster" program, includes several components aimed at encouraging investment and boosting the economy. Here are potential impacts and criticisms of this package on companies, states, municipalities, electric vehicles, and job retention:

Potential Impacts

Companies

Increased Competitiveness: Tax incentives and reduced tax rates aim to make Germany more attractive for investment, potentially boosting its competitiveness in the global market.
Investment Incentives: Tax write-offs for machinery, equipment, and electric vehicles could encourage companies to modernize and expand, leading to increased investment in technology, infrastructure, and employee training.

States and Municipalities

Infrastructure Funding: The separate €500 billion infrastructure fund could support local infrastructure projects, benefiting states and municipalities by improving public services, creating jobs, and promoting economic growth.
Boosted Economic Activity: Improved infrastructure and streamlined fiscal policies may result in increased economic activity, improving tax revenues for states and municipalities.

Electric Vehicles

Accelerating EV Adoption: Tax incentives for purchasing electric vehicles could promote the adoption of EVs, contributing to environmental goals and aligning with global trends towards sustainable transport.
Environmental Benefits: Increased EV adoption may lead to reduced emissions and improved air quality, benefiting both the environment and public health.

Job Retention and Creation

Job Creation: By encouraging investment and modernization, the package could lead to job creation in sectors benefiting from tax incentives, such as manufacturing, technology, and research.
Job Retention: The potential boost in economic activity and investment could help retain existing jobs, ensuring a vibrant, competitive economy.

Criticisms