Macroeconomic Consequences of US Tax Reform for Germany: Greater Need for Action

​This report estimates the positive effect of the tax cuts on real economic growth in the US at more than half a percentage point in 2018 and between a quarter and half a percentage point in 2019. Additional economic effects could result from the Bipartisan Budget Act of 2018, which leaves room for considerable additional government expenditure. The global economic impact of any such additional growth in an economy as big as the US, which generates almost 25% of the world's economic output, is not negligible. Global economic growth is likely to benefit from the tax cuts by 0.1 - 0.2 percentage points each year. This range of figures should also apply to Germany.


There are a number of channels through which the dollar exchange rate against the euro and the level of long-term interest rates in the Eurozone may be affected. Despite the current tendency to the contrary, we expect a slight strengthening of the dollar and a limited effect on long-term interest rates in Germany, raising them by up to a quarter of a percentage point. 

The US tax reform is likely to shift the balance of direct investment with the US further to the disadvantage of Germany. The outflow of capital from Germany in the direction of the US could increase significantly. 

The European response to the US tax reform should not be confined to harmonisation of the EU-wide corporation tax. Instead, the focus should be on a more attractive framework of conditions for investment. Measures of this nature could allow EU countries to enhance their appeal to multinational groups in particular, while maintaining relatively high standard rates of corporation tax.

 

In Germany, the overall tax burden on companies has even risen further in recent years, contrary to the EU-wide trend. Nevertheless, purely introducing tax cuts would probably not be an adequate response to the US tax reform. Fine adjustment to the existing system of corporate taxation is not needed; instead, a real re-organisation of the company taxation levied through corporation and local business tax is required. It would be a brave step for tax policy if the increased pressure to act were to instigate re-organisation of municipal finances. Local business tax should be fundamentally put under the spotlight – and not just when revenues slump once again due to the economic cycle, rocking the financial position of municipalities.