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[Corporate taxes and investment: Germany in an international context]

As economic activity becomes increasingly integrated, the taxation of corporate income has to be considered in an international context. This study considers developments in the USA, Japan, Germany, France, the UK, Denmark and the Netherlands. We consider the proposed reform of corporate taxation in Germany in this context, particularly with respect to its likely effects on business investment.

The most striking feature of corporate taxation over the last twenty years has been a general trend towards lower corporate income tax rates. This trend shows no sign of stopping. Japan, Germany, the UK and Denmark cut their corporate tax rates in 1999, and France reduced its surcharge on corporate profits.

This trend is broadly consistent with results from the economic analysis of corporate income taxes in open economies. Taxes on corporate income in small open economies are borne not by the owners of internationally mobile capital, but by relatively immobile workers - either in the form of lower wages or lower employment as a result of lower capital formation. Taxes on income from employment, which tax workers directly, are likely to be more efficient than taxes on corporate income, since they avoid this distortion to capital-labour ratios.

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