Germans Fear Tax Cut Will Spur US Investment and Growth

The Democrats in Congress and the press have frantically tried to convince the American people that cutting businesses taxes won’t do any good. This view is delusional, but we hear it so often it almost begins to sound plausible. Here is a contrary view from a different source, German industry: “Germans fear huge loss of jobs from US tax reform.”

German investment in the US is expected to rise by €39 billion because of lower US corporate taxes.

While Americans are anxiously awaiting full details of the tax bill now being finalized in Congress, German economists are warning that the changes sought by President Donald Trump mean that significant amounts of new investment and jobs will shift from Europe to the United States.

“The tax competition will have a new dimension,” said Christoph Spengel, chairman of the corporate tax department at the University of Mannheim. Mr. Spengel, who is also a research associate at the Center for European Economic Research, and a group of tax experts at the university have done a detailed comparison of the two countries’ tax systems and published a report under the heading, “Germany loses out in US tax reform.”

Clemens Fuest, who heads the Ifo economic think tank, also said he believed German business would suffer. “Investments and jobs will migrate to the US,” he said.

The report itself is dense and technical, but interesting. A few readable excerpts:

Scholars and politicians from both US parties agree that the high statutory corporate income tax rate of up to 39% (35% federal rate) is a devastating factor in international tax competition and should therefore be decreased (see, e.g. Avi-Yonah and Mazzoni 2017, see Devereux et al. 2008 for an analysis of competition over tax rates).

Scholars certainly agree, but “politicians from both parties”? Someone better tell Nancy Pelosi.

When considering the changes in US outbound FDI [Foreign Direct Investment] and US inbound FDI, total investment within the US will increase more than in Europe once the tax reform is implemented. This means that despite the overall expansion after the US tax reform which is expected to foster FDI in all countries, the US will benefit disproportionally by additional inward FDI.

Which means that Europeans will be creating American jobs. Finally:

The expected significant reduction in the statutory federal corporate income tax rate from currently 35% to 20% [Ed.: The final rate was 21%] will presumably have a substantial impact on the location attractiveness of the US in global tax competition. As evident from Figure 6, the proposed corporate tax reform would improve the US competitive position relative to the EU Member States from being among the jurisdictions with the highest effective corporate tax burden to a jurisdiction with a comparatively moderate effective tax rate.

It is hard to understand how the Democrats can deny basic economic realities that European economists regard as virtually self-evident. That isn’t the Democrats’ biggest problem, though. They will really have a lot of explaining to do when a large majority of Americans see their paychecks increase in February.

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