International Finance
Economy

Fuest favours major reform of local business tax

Says it is worth considering abolishing the local business tax and replacing it with a community surcharge on income and corporate tax

ifo President Clemens Fuest favours a major reform of Germany’s local business tax. “The heavy reliance of Germany’s municipalities on this tax is dangerous,” he said in Berlin.

“If municipalities are negatively impacted by poor economic developments and increase the local business tax to stabilise their budgets, this not only burdens local company owners and dampens investment. It also also leads to slower wage growth, since companies pass on around half of the burden from higher local business tax to employees, as we show in a recent study. This, in turn, threatens to create a vicious circle consisting of a rising tax burden and economic stagnation,” explains Fuest. In his view, it is worth considering abolishing the local business tax and replacing it with a community surcharge on income and corporate tax, along with grants based on local payroll.

According to Fuest, “Low-skilled workers, young employees and women are hit hardest by the negative wage effects of rising local business taxes. This shows that the real distributional effects of corporate taxes differ from how they are often portrayed.”

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