Fiscal Investment Climate and the Cost of Capital in Germany

Measured in terms of the cost of capital, the investment climate in Germany currently ranks 24th Key Messages out of the 28 EU member states. However, this represents an improvement over the year 2000, when Germany ranked 27th. In fact, among the EU-28, Germany has seen the most significant decline in the cost of capital between 2000 and 2014, from 7.7% to 6.5%. This decline is mainly attributable to considerable reductions in the country’s corporate tax rate. The comprehensive corporate tax reforms enacted in 2001 and 2008 thus appear to have succeeded in improving the investment climate in Germany. Nevertheless, in comparison to most other EU member states, the cost of capital in Germany is still quite high. In order to further improve the investment climate in Germany, the (temporary) re-introduction of reduced-balance tax depreciation for movable fixed assets is currently being discussed. However, our analysis indicates that this would only slightly decrease the cost of capital from 6.5% to 6.3%. When we additionally account for the personal taxation of individual investors, a different picture emerges: The overall cost of capital in Germany currently amounts to 6.0%, and could be reduced considerably by taxing dividends and capital gains at lower rates than interest income.