In its program for the German federal elections upcoming in September, the liberal party (FDP) calls for corporate tax cuts. The tax burden on companies is to be reduced to 25%. FDP party leader Lindner argues that this will provide investment incentives, which in turn will boost economic growth. As a result of higher growth, the FDP expects more tax revenues. The CDU/CSU also want to reduce taxes for companies perspectively.
Of course, the German election campaign is not the first campaign in which we hear promises that corporate tax cuts will provide a strong boost to the economy. The claim that lower corporate taxes will benefit the broader population through more growth has been a core element of supply-side economics at least since Ronald Reagan, touted in the past by conservatives and liberals as much as by flexible power politicians a la Trump.
From an economic theory perspective, the growth effects to be expected from tax cuts are ambiguous. In recent growth models, corporate tax cuts may have a positive effect on the growth rate by boosting technological progress and innovation. However, other theoretical work suggests that capital taxation is not harmful to growth if it shifts the tax burden away from taxing labour or funds productive government spending. The growth effects of tax changes are thus essentially an empirical question.
In a new study, Sebastian Gechert and I synthesise the relevant literature on the effects of corporate taxes on economic growth by using econometric methods from the meta-analysis toolbox. We show that a proper summary of existing studies indicates that there is no evidence for positive growth effects of corporate tax cuts. The empirical evidence thus suggests that those who claim strong growth effects from falling corporate taxes are pushing exaggerated hopes.
Source: Gechert and Heimberger (2021): Do corporate tax cuts boost economic growth?
Companies hit hard by the pandemic with high loss carryforward will foreseeably gain little from a tax cut anyway, because they do not pay profit tax. And then there is the big problem that cutting corporate taxes will lead to billions of euros in lost tax revenue when the promised positive growth effects do not materialise. This will further increase the fiscal austerity pressure for the government in the wake of the COVID-19 crisis, putting downward pressure on public investment.
It would be more effective if the next German government did not reduce corporate taxes and instead used the tax revenues to invest in climate- and digitization-friendly infrastructure. Companies would then also benefit from future-proof infrastructure.
This comment is a slightly adapted version of a text that first appeared in Handelsblatt in German.