With the 2018 corporate tax reform, the USA has gained a considerable advantage over Germany in terms of offering favourable tax conditions. While before the US tax reform Germany’s lower profit tax rates were very appealing to businesses, this changed somewhat following the US corporate income tax cut from 35 per cent to 21 per cent. However, since German municipalities can set their own trade tax rates, they still have a considerable decision-making power regarding their capacity to compete internationally.

The study compares the tax rates of selected US states – Texas, New York, California, North Carolina and South Carolina – with those of Bavarian municipalities. The selection was made depending on the level of corporate income tax in the individual states, which is levied in addition to corporate income tax at the US federal level. In Bavaria, the municipal trade tax rate ranges from 230 per cent (Wolfertschwenden in the Lower Allgäu) to 490 per cent (Munich), which in turn results in a range for the combined profit tax rate from 23.9 per cent to 33.0 per cent, respectively. Given the fact that similar disparities can be observed all across Germany, the results of the study on Bavaria can be regarded as representative.

Great differences in tax burden

Prior to the US tax reform, all German municipalities were found to have had lower profit tax rates than all US states considered in the study. After the reform, however, even locations in Germany with a low combined profit tax rate such as Wolfertschwenden have fallen behind low-tax states in the US such as North Carolina (combined profit tax rate of 23.4 per cent). German low-tax municipalities, however, continue to be more attractive for businesses than some major US states that have comparatively high tax burdens. For example, the total tax burden in, say, Wolfertschwenden is 23.9 per cent, which is below the tax burden in New York (26.1 per cent) and California (28.0 per cent).

“Given that companies factor in the overall tax burden in their decision to settle down in business, the trade tax is very important for Germany to remain competitive on an international level,” concludes Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” and co-author of the study.

For more information please contact:

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621-1235-149, E-mail friedrich.heinemann@zew.de