Press release -

Lower Taxes for Companies in Germany Increase Wages and Employment

Lower taxes for companies lead to higher wages, more employment, and higher growth. Tax revenue also returns to baseline levels over the long term, finds an ifo Institute study that has been published in advance in ifo Schnelldienst. “For a transition period, there are indeed some tax shortfalls. But these can be viewed as an investment by the state to enable higher wages, more employment, and a higher level of consumption in the future,” says ifo President Clemens Fuest.

The study considers the consequences of reducing the corporate tax rate from 30 to 25 percent and shortening the period of tax depreciation for investments from ten to four years. A combination of the two reforms would reduce tax revenue by EUR 30 billion in the short term. However, after a period of adjustment, economic output and private household consumption would be around 3 percent higher than without the reforms. Employment would increase by 1.4 percent and wages by around 4 percent.

If, on the other hand, tax increases were the goal of policymakers, a higher VAT rate would be less of a burden on employment and growth than an increase in income tax. If the income tax rate were increased by 3 percentage points on incomes above EUR 100,000, the state would generate EUR 4.9 billion in additional tax revenue in the first year. In the long term, however, the additional tax revenue would fall to EUR 3.4 billion, while economic output would fall by 0.4 percent. Increasing VAT by 1 percentage point, meanwhile, would raise tax revenues by EUR 7.4–7.8 billion while reducing gross domestic product by only 0.2 percent.

Infographic, Long-Term in Economic Impact of Tax Reforms
Infographic, Long-Term in Economic Impact of Tax Reforms

Publication (in German)

Article in Journal
Florian Dorn, Fuest Clemens, Florian Neumeier, Michael Stimmelmayr
ifo Institut, München, 2021
ifo Schnelldienst, 2021, 74, Nr. 10, 03-11
Contact
Prof. Dr. Dr. h.c. Clemens Fuest

Prof. Dr. Dr. h.c. Clemens Fuest

President
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Harald Schultz

Harald Schultz

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