German tax system: competitiveness rankings
In the wake of Halloween, the leaders of the world’s 20 largest economies approved a 15% global minimum tax on large multinational corporations. The minimum tax, signed in Rome and announced by the Organization for Economic Co-operation and Development (OECD), aims to curb profit shifting and limit competition in tax rates between governments.
However, in the shadow of this deal lies a chilling truth. A country’s tax code is not limited to the rate at which the government taxes a company.
For example, Germany has the fifth highest combined corporate tax rate among OECD countries, at 29.9%. Italy has a much lower rate, at 24 percent. Considering the lower rate and the fact that Rome has just hosted such a historic tax agreement, Italy must have a more competitive tax code than Germany, if?
The short answer is nein.
How then to measure the competitiveness of a country’s tax code? More useful, how to compare the tax codes of the most impactful economies in the world like those of the G7? In what ways should governments strive to be competitive without harming economic growth or using narrow preferences to attract investment?
The Tax Foundation recently released 2021 International tax competitiveness index (ITCI) provides many of these answers. The Index aims to assess the competitiveness and neutrality of a country’s tax code by measuring more than 40 tax policy variables. Competition and neutrality are essential to a strong tax code because they promote economic growth and investment while generating sufficient revenue for government priorities.
So how do Germany and Italy rank this year compared to their G7 partners?
Germany retains most competitive G7 tax code despite slipping 15e to 16e overall among OECD countries from 2020 Index. Canada ranks second in the G7 with 20 yearse across the OECD, followed by the United States at 21st, the United Kingdom at 22sd, Japan at 24e, and France at 35e. Italy is the least competitive tax code of the G7 and the OECD at 37e globally.
How can Germany be the first G7 tax code with such a high corporate tax rate? Doesn’t this rate make Berlin less competitive? Are Tax Foundation Experts Using the Wrong Formula?
Germany scores well on several important tax policies compared to its G7 partners beyond its corporate tax rate. Impressive, Germany’s property tax score ranks best in the G7 and 11e across the OECD. This is mainly due to a decrease in the tax burden on companies looking to improve their property through renovations or the expansion of a factory and the absence of wealth tax, wealth tax or on financial transactions.
Second, Germany’s cross-border scores rank second among G7 countries and sixth among OECD countries. This is due to the combination of Germany’s vast network of tax treaties with 96 countries and competition rules that facilitate cross-border investments.
Some G7 countries outperform Germany in specific cross-border policies, such as the UK, with the most extensive network of tax treaties (132 countries), and Canada, with more flexible anti-tax avoidance rules. However, only the UK has a best combined average score for the four G7 cross-border policies.
Finally, Germany’s consumption tax scores rank 11e best among OECD countries. Although this is only the fourth best score in the G7, the German value added tax (VAT) or consumption tax is 19%, practically the same as the OECD average (19.2 %). In addition, the German VAT compliance burden is relatively low and has an above average base rank. These above-average scores keep the German general tax code relatively competitive in the G7.
If Germany tops the G7, what can other G7 countries learn from its tax code?
Other G7 countries should think about the types of tax policies they rely on for their income in relation to their impacts on economic growth. Countries like France and Italy rank lower than Germany on all major indicators of the Index although France has lowered its corporate tax rate in recent years and Italy lowered its corporate tax rate from 31.4% to 24% in 2017. Several countries, including Canada, US and UK rank better than Germany for corporate and individual tax rates. Japan’s rank on corporate tax rates is lower than Germany’s but ranks better on personal tax rates.
These countries were unable to overtake Germany’s top G7 rank in the Index because they are not competitive in other important tax areas, such as cross-border tax rules, consumption taxes, and property taxes, all of which contribute to a well-designed tax system.
Germany’s relatively competitive and neutral tax policies strike an effective balance. The government raises enough revenue to support the German social system while promoting investment and economic growth. This balance has enabled the German economy to withstand the economic fallout from the COVID-19 pandemic and the resulting supply chain issues.
However, Germany still has room for improvement compared to other OECD countries. Personal income tax in Germany, for example, is complex with an associated compliance charge of 134 hours. It is the third highest among OECD countries. In addition, as mentioned earlier, Germany has the fifth highest corporate tax rate in the OECD. While the German tax code does a lot of things right, reforming these policies to increase economic growth would make investments in Germany much more competitive.
In a world dominated by corporate tax rate headlines and fears of a race to the bottom, governments and citizens should focus on what really makes a tax code neutral and competitive. More often than not, taking the German tax code as an example, G7 countries can improve the stability of their incomes and the lives of those they represent.
Launch 2021 International tax competitiveness index
Was this page useful for you?
The Tax Foundation works hard to provide insightful analysis of tax policy. Our work depends on the support of members of the public like you. Would you consider contributing to our work?
Contribute to the Tax Foundation
Let us know how we can better serve you!
We are working hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?
Give us your feedback