In the struggle for a possible coalition, the SPD, FDP and the Greens could also agree on significantly faster depreciation options for companies.
However, states and municipalities would be hit hard by such a regulation, warns the economist Prof. Achim Truger in the guest article.
There are major differences between the potential future governing parties in terms of tax and financial policy: Red-Green would like to slightly increase taxes for the wealthy and the rich in order to finance a stronger state and relief in the lower and middle income bracket.
Black-and-yellow, on the other hand, is betting on massive tax cuts for companies and the wealthy to unleash the economy.
The tax cuts targeted in the election programs are very large, the Union should end up with 30 billion euros annually, the FDP is even aiming at a gigantic 90 billion euros.
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Actually, that sounds like irreconcilable differences.
But something is happening.
Even before the election, most of the Union's plans were subject to financial reserve.
And in the election campaign, both the Union and the FDP primarily aimed at preventing tax increases after the election.
Now there is obviously quite a gap between preventing tax increases and the reduction plans that have been formulated.
Public finances deep in the red due to Corona
But this can be explained by the fact that large tax cuts were unrealistic from the start: The state finances have slipped deep into deficit due to the Corona crisis, so that future compliance with the debt brake, which the Union and FDP are particularly pushing, will be a challenge.
Substantial tax cuts in this situation would lead to drastic spending cuts, which would restrict the state's ability to act and jeopardize the economic recovery.
So it's good that such fantasies are cleared away for now.
Miracle weapon depreciation relief?
In the search for compromise relief options for companies, a new miracle weapon has now emerged that is causing enthusiasm among many. Depreciation relief is the magic word. Instead of lowering corporate tax rates, companies should be able to write off capital expenditures faster. This means that they can quickly deduct a larger part of the expenses from tax. The tax break acts as an incentive to invest faster or more.
The good thing about it: As with the tax rate cut, companies do not simply receive tax relief, the use of which in the company is uncertain, but they only receive tax relief if they actually invest. The depreciation relief is therefore more targeted. It is unclear whether this would actually bring a lot of investment at the moment, because the companies had only just been granted temporary depreciation relief due to Corona, so they have probably already brought some investments forward.
But another advantage is mentioned: The state has no permanent loss of income, for it only the tax losses due to depreciation are distributed differently over time.
Higher losses in the first few years are offset by increased income in the following years, because the investment has already been written off and cannot be further deducted.
This means that the depreciation relief does not permanently weaken government revenues, the public budgets only have to forego revenues for a few years for a short period of time.
Extended depreciation conditions hit public budgets at a critical moment
But that is exactly where the problem lies, because the revenue shortfalls would hit the public budgets precisely in the tricky transition phase to re-comply with the debt brake and could be quite large. According to a widely acclaimed study by the Ifo Institute, substantial reductions in depreciation and amortization would boost investments considerably, but would lead to very large revenue shortfalls of 17 billion euros in the first year and an average of 10 billion euros annually in the first three years.
Even if the new federal government found a way of financing, for example through a somewhat more generous interpretation of the debt brake - actually rejected by the Union and FDP - the problems for the federal states and municipalities would not be solved: Together they would account for around two thirds of the loss of revenue, on the municipalities in the end almost 45 percent, i.e. 7.5 billion euros in the first year alone, and an average of 4.5 billion euros in the first three years.
Extended depreciation could weigh on public investment
However, one has to worry about the financial situation of the municipalities at the moment anyway, because they will still suffer a lot from the corona-related loss of income in 2021 and in the following years. If, as the largest public investors in Germany, they have to cut their investments because of additional failures, this will not only damage the local infrastructure, which is still lamentably poor in many places, but it would also be counterproductive for the economy as a whole. In this respect, the question of compensating for the tax shortfalls in the federal states and their municipalities would arise, especially since the federal states have to approve the depreciation relief in the Federal Council anyway.
Obviously, the depreciation relief is not really fully fused yet, and the supposed miracle weapon could cause considerable collateral damage.
About the person: Prof. Achim Truger is a member of the Advisory Council for the Assessment of Macroeconomic Development and Professor for State Activities and State Finances at the University of Duisburg-Essen.