WHU General

Tax Policy As An Adjustable Screw

Professor Dr. Martin Jacob analyses which instruments may help companies through the crisis.

In order to be able to cope with the economic impact of the corona crisis, the German Government put together a 750 billion euro aid package as of mid-March. Professor Dr. Martin Jacob, chairholder of the adidas Chair of Finance, Accounting and Taxation at WHU - Otto Beisheim School of Management also believes that these are the right and necessary measures to prevent domestic companies from succumbing to the crisis. Taxation policy in the focus of his approach, he analyzed in the new WHU online course series which levers are still available to the tax authorities to ease the burden on companies and support their recovery.

Titled "Tax policy after the corona crisis", Prof. Dr. Martin Jacob's research focuses on three types of taxes whose reduction could relieve companies in the current situation: corporate tax, value added tax and dividend tax. Many companies, especially small and medium-sized ones, are currently facing liquidity problems. In this context, it is obvious that a reduced corporate tax would help them to pay their bills and pay wages to their employees. When comparing OECD member countries, Germany takes a top position with 30 percent corporate tax. If this tax was now to be reduced in times of crisis, this would create the possibility to make investments more attractive to foreign investors, and thus attract capital. At the same time, it would allow domestic companies higher investments, Jacob explained. Research conducted after the financial crisis of 2008 showed that a large number of companies immediately reinvested everything they had saved into their own company.  

Taxes paid directly by individuals can still have a major impact on companies. In this context, Prof. Dr. Martin Jacob mentions above all value added tax and dividend tax. For example, increases in value added tax cannot be passed on by companies to the consumers at will. The reasons are psychological thresholds at prices such as 9.99 euros. In such cases, companies tend to refrain from passing on costs because otherwise they would sell fewer products and thus reduce their profits.

Another tax that can be burdening for companies even though they do not pay for it directly is the dividend tax. If the company has enough cash available, the taxation of shareholders is initially of little consequence. However, if they have little liquid assets at their disposal, a reduction in dividend tax helps to attract fresh capital from investors. These additional funds then help the company to reinvest and pay its employees.

Direct government subsidies to companies are a short-term means of improving their chances of survival and calming the financial markets. As the studies reveal, on the long run, countries like Germany can use different taxation instruments to keep their domestic companies alive. However, this should not only focus on the levies that companies have to pay directly, but also on levies that may affect potential customers and investors.