High Tax Burden Weighs on Investments

The discussion began by considering the planned income tax reform in the context of the broader economic situation. Economic performance and investment remain weak, while the tax and social security contribution ratio stands at a high level of approximately 42 percent. At around 30 percent, the nominal tax burden on corporations in Germany is significantly higher than the OECD average of 24 percent.

The reform of the personal income tax schedule must therefore also take its impact on businesses into account. Around 76 percent of businesses in Germany are partnerships or sole proprietorships. For these businesses, personal income tax is not merely a personal tax payable by their owners, but also the principal tax on their business income. An estimated 70 percent of the tax base subject to the additional top tax rate is attributable to business income. Any increase in this tax burden would therefore particularly affect unincorporated businesses, including many small and medium-sized enterprises and family-owned businesses.

No Additional Burden on Unincorporated Businesses

Among other measures, the draft 2027 Income Tax Reform Act provides for increases in the basic personal allowance and the child allowance, as well as higher child benefit payments and a higher employee lump-sum allowance. It also provides for a flattening of the second progressive income tax bracket. At the same time, the additional top tax rate would apply from a taxable income of EUR 250,000. A tax rate of 47 percent is envisaged for taxable income exceeding EUR 280,000. In addition, the flat-rate tax on marginal employment would increase from two to five per cent, while tax incentives for household repair and maintenance services would be reduced.

Of the planned tax relief amounting to just under EUR 9.9 billion, the net relief remaining once the measures are fully effective on an annual basis would therefore amount to approximately EUR 5.5 billion. The reform would not fully offset the effects of bracket creep.

From the business community’s perspective, the draft therefore requires further improvement. Income tax thresholds should be reliably adjusted for inflation, the solidarity surcharge should be abolished in full, and the income threshold for the top tax rate should be designed in a manner that appropriately reflects taxpayers’ economic performance. Above all, the planned tax relief should not be financed through additional burdens on business activity.

Twelve Proposals for Genuine Simplification

Tax simplification is more than a technical detail. Sixty-eight percent of businesses report that the regulatory burden associated with tax and financial reporting has increased. Overall, the cost of bureaucracy has risen from five to seven per cent of annual turnover. The announced Tax Simplification Act should address this issue.

Together with business practitioners, the BDI has developed twelve proposals designed to limit the impact on tax revenue and brought them together in a https://bdi.eu/de/publications/vorschlaege-zum-steuerlichen-buerokratieabbau. The option model for partnerships to be taxed as corporations and the preferential tax treatment of retained earnings should be made more practicable. A modern group taxation system could replace the error-prone profit and loss transfer agreement. Further areas for reform include simpler rules for non-cash benefits and corporate restructurings, a streamlined application procedure for the research and development tax allowance, and faster, more digitalized tax audits.

The exchange between representatives from politics, academia and the business community made clear that the reform of the personal income tax schedule and the simplification of corporate tax law should be considered together. The key objective must be to use the announced Tax Simplification Act to establish practical procedures, reduce bureaucracy and provide a reliable framework for investment.