Fiscal Investment Climate and the Cost of Capital in Germany
2015
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.
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