Should Germany Abolish the Corporate Income Tax?

The stark disparity between the relatively low government revenue derived from corporate taxes and the substantial contributions from labour and consumption taxes in Germany underscores the need for a fundamental reassessment.

Can the continued imposition of a corporate income tax – one that burdens many of Germany’s export-driven businesses while yielding limited fiscal returns – still be justified? Many of these companies, along with their suppliers, often SMEs, are currently grappling with a wave of layoffs driven by intensified global competition, which shows no signs of abating. A bold reform, or even outright abolition, could dismantle this outdated structure, enabling Germany and its EU counterparts to pivot toward revenue models that reduce economic inefficiencies and strengthen global industrial competitiveness.

Significant differences in statutory corporate tax rates and effective rates across countries, driven by opaque exemptions and subsidies, highlight the need for market-based democracies to lead as global tax role models. The success of the 2017 US Tax Cuts and Jobs Act, which boosted private-sector investment and fostered long-term economic growth, demonstrates the substantial benefits of bold tax reforms in attracting capital and enhancing industrial competitiveness.

A simplified tax system with reduced corporate taxes would affirm Germany’s commitment to fairness, efficiency, and rule-based governance in a global economy. It would also strengthen its leadership in the EU, setting a benchmark for sound and forward-looking economic policy.

Transformative corporate tax reform, under potential conservative (CDU) leadership, could serve as a cornerstone for Germany’s next government, signalling a bold vision for economic renewal and strengthening its leadership role in shaping the EU’s industrial and tax competitiveness.

Corporate Tax Out of Effective Political Control

In 2019, I published a paper titled Corporate Tax Out of Control, which highlighted the overwhelming complexity of corporate tax laws. These complex frameworks require the involvement of costly consultants, lawyers, and overcharged tax bureaucrats. Corporate tax code complexity disproportionately benefits large firms that can afford tax experts, enabling them to reduce their liabilities, while smaller businesses and individual entrepreneurs are left to shoulder a big financial burden.

Moreover, tax incidence data reveals that the real economic burden of corporate taxes often shifts to other stakeholders, such as workers through lower wages, consumers through higher prices, or shareholders through reduced dividends. This dynamic undercuts the traditional justification for corporate income taxes as a mechanism to tax capital wealth, instead demonstrating how such taxes can distort broader economic outcomes.

The convoluted nature of corporate tax codes, compounded by frequent legal changes, creates a self-reinforcing cycle of inefficiency and reduced accountability, making meaningful reform increasingly difficult. Politicians genuinely committed to fairness and efficiency must confront the path dependency of corporate taxation – where complexity perpetuates itself – entrenching opaque rules in a system that diminishes the authority of elected lawmakers and hinders reform efforts.

Corporate Tax Policy and the Future of Germany’s Export-driven Industry

But there is more than just fairness. Policymakers must understand the “hidden” impacts of taxes on corporate income, if they are genuinely committed to advancing economic and trade competitiveness.

Germany, though highly industrialised, functions in many ways as a small, open economy compared to global powerhouses like the United States, China, and large emerging markets. With its export-driven industry and limited domestic market size, Germany will increasingly face challenges in attracting investment through market scale alone. Instead, its industrial competitiveness increasingly depends on a supportive tax and regulatory framework. This structural constraint, typically emphasised by smaller nations in OECD tax fora, highlights the urgency for Germany to prioritise “tax competitiveness” to sustain its economic standing and foster the commercialisation of private-sector technology developments.

How Germany Compares with Global Benchmarks

Germany’s statutory corporate income tax rate of 29.9% is among the highest in the OECD, exceeding the European average of 21.9%. This rate includes a 15% federal corporate tax, a 5.5% solidarity surcharge, and a municipal trade tax averaging 14%, though the municipal rate can vary significantly by location. In comparison: Ireland offers a competitive 12.5% statutory rate, attracting global investment, particularly in tech and pharmaceuticals. Estonia only taxes distributed profits. There is no corporate income tax on retained and reinvested profits, creating strong incentives for reinvestment. The United States maintains a combined federal and average state corporate tax rate of 25.6%, reduced from 35% to 21% (federally) under the Trump administration’s 2017 Tax Cuts and Jobs Act, making US businesses more competitive internationally. Further tax cuts to 15% are being proposed as part of the President-elect’s upcoming economic agenda to attract investment and boost business operations.

Tax Drains and Misguided Subsidies

Germany is not alone in facing the challenge of unproductive innovation strategies exacerbated by inefficient fiscal policies. Across Europe’s high-tax economies, governments frequently take substantial income from businesses and individuals through taxes, only to redirect it into subsidies that often fail to deliver tangible economic benefits. A closer examination of R&D subsidies reveals this inefficiency. Germany offers an implied R&D tax subsidy rate of 19%, and France 36%, yet these generous provisions rarely translate into competitive commercial innovations. In contrast, the United States, with a significantly lower implied subsidy rate of just 3%, consistently excels in turning R&D into market-ready technologies and products.

This approach represents a critical flaw in Europe’s fiscal and innovation strategy. High taxes drain resources from productive industries, only to funnel them into politically favoured projects or individual companies, often with little accountabilty or clear economic rationale. The result is a cycle of misallocated resources, wasted opportunities, and limited returns, leaving Europe increasingly lagging more market-driven economies like the United States. Unlike Europe, where entrenched political interests, including tax advisory industry, remain heavily invested in preserving the current system and blocking meaningful reforms, leaders like the US President-elect may benefit from not being beholden to such constraints.

Tax Law Complexity: The Overlooked Challenge Beyond Rates

Germany ranks 34th out of 100 countries in the Tax Complexity Index. Its corporate tax code is among the most complex globally, including bulky transfer pricing rules and layered capital gains provisions. These issues are compounded by Germany’s federal structure, where overlapping tax jurisdictions and varying compliance requirements heighten the administrative burden. Overly frequent updates to tax rules create uncertainty and costs for businesses and complicate long-term financial planning – particularly SMEs, which typically lack the resources to adapt.

Furthermore, despite Germany’s reputation for engineering and innovation, its tax system lags in the adoption of digitalisation and automation, with many processes still reliant on in-person interactions with tax officials. In contrast, countries like Estonia and Singapore, which rank 2nd and 4th in global tax complexity, have achieved much greater efficiency through streamlined tax codes and advanced digital tax administration systems. Germany’s reliance on manual processes and its extremely convoluted digital tool, ELSTER, pales in comparison to the user-friendly, automated platforms of these digital frontrunners, underscoring the urgent need for reform.

Only 6.2% Revenue Contribution: Time to Rethink Corporate Taxes

Returning to the central question posed by this paper – Should Germany abolish the corporate income tax altogether? – the answer is far from straightforward. In Germany, corporate income taxes contribute only about 6.2% of total tax revenues, underscoring their limited fiscal significance compared to other revenue sources like labour taxes (27.1%), social insurance contributions (37.2%), and consumption taxes such as sales tax (26.7%). Similarly, in France, corporate income taxes account for only 6.3% of total tax revenues, highlighting that corporate taxes, though symbolically important, play a relatively minor role in public finances. This modest contribution raises questions about whether the economic inefficiencies (the tax incidence) and enormous administrative burdens of corporate taxation outweigh its revenue effects.

Importantly, governments generally face a growing challenge in taxing mobile factors of production, such as multinational corporations, which can relocate operations to more tax-friendly jurisdictions with relative ease. By contrast, less mobile factors like workers and domestic sales are far less inclined to leave the country. Shifting the tax burden towards these more stable sources could reduce economic distortions, ensuring a steady revenue stream while making the economy more attractive to globally mobile businesses.

Moreover, the substantial gaps between nominal tax rates and actual tax receipts in countries like China, driven by opaque tax rules and subsidies, underscores the need for democratic market economies, like Germany, to lead as a global tax model. By simplifying its tax system, ensuring transparency, and avoiding subsidy-driven distortions, the next German government can set a benchmark for fairness and efficiency. This approach would not only bolster the country’s competitiveness but also demonstrate the strengths of a Democratic Social Market Economy by emphasising political accountability, tax transparency, and rule-based economic governance. By setting a standard for fair and responsible tax policy, Germany can lead by example in a globalised market economy.

However, the political attachment to corporate taxes as a grandstanding symbol of fairness – ensuring business entities “visibly” contribute tax to society – still is deeply entrenched. This symbolic value must be critically weighed against the substantial practical inefficiencies of such taxes, including their stifling effect on international industrial competitiveness.

Incremental adjustments have consistently failed to address the structural inefficiencies that hinder the country’s competitiveness. If a government decides to maintain corporate income taxes for symbolic rather than rational reasons, these reforms become even more crucial to mitigating their economic impact and fostering a more balanced, competitive tax system. The following steps outline how Germany (and other EU Member States) could move forward:

1. Substantially Simplify Tax Laws and Lower Corporate Tax Rates: Corporate income taxes contribute relatively little to Germany’s total tax revenue yet impose significant financial and administrative burdens. Simplifying the tax regime and aligning rates with the United States – or adopting Estonia’s model of taxing only distributed profits – would lower compliance costs, encourage investment, and enhance Germany’s investment attractiveness.
2. Modernise Tax Administration: The complexity of Germany’s tax system, stemming from layers of layers of provisions, overlapping jurisdictions and manual processes, hampers efficiency. A digital-first approach and user-friendly systems would reduce compliance costs, especially benefiting SMEs, and create a more equitable business environment.
3. Rebalance Revenue Sources While Avoiding Overtaxation of Skilled Workers: Germany should aim for a more balanced tax structure by increasing reliance on consumption-based taxation and re-evaluating the role of capital and property taxes. Deliberate adjustments to sales taxes and capital income taxes could be considered. Crucially, it is vital to avoid disproportionately taxing skilled workers, ensuring they remain incentivised to drive innovation and contribute to economic productivity.
4. Harmonise EU Tax Codes: Rather than standardising tax rates, harmonising tax codes across the EU would reduce administrative redundancies and simplify cross-border operations. This approach would maintain healthy tax competition among EU member states while ensuring a level playing field for tax base calculations. By fostering both fairness and competitiveness, Germany could position itself as a leader in driving a more efficient and integrated European market.