With the 2008 reform of business taxation (Unternehmensteuerreform 2008) a preferential treatment of retained earnings for non-incorporated companies was introduced: Earnings may be retained at a preferential tax rate (29.8%) and will be subjected to supplementary tax (26.4%) when they will be withdrawn in the future. By now, studies on this topic have been based on case studies. Our article is based on microdata of the German Income Tax Statistics 2002 and provides a general empirical analysis of the new regulation's fiscal effects. Unlike studies before, we do not only consider marginal tax rates but also take into account that retained earnings may reduce progressive income tax for other earnings. Moreover we consider that taxpayers may retain earnings without having to pay supplementary taxes on these earnings if they are withdrawn within two years. On the individual level, beneficiaries of the preferential treatment are mainly taxpayers with high income. For instance, those with an annual income of at least 750,000 Euro reduce their tax burden by approximately 10% (unmarried, withdrawal before retention of 100,000 Euro). By contrast, taxpayers with an annual income of less than 22,087 Euro do not benefit from the reform at all. On the macroeconomic level, the fiscal effects of the reform are considerable: Depending on the scenario, we estimate a shortfall in receipts of 3.4 bn, 5.0 bn Euro and 7.5 bn Euro (theoretical upper limit).
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number
765.
Length: 19 p. Date of creation: 2008 Date of revision: Publication status: Forthcoming in: Betriebswirtschaftliche Forschung und Praxis (2009) Handle: RePEc:diw:diwwpp:dp765
Find related papers by JEL classification: H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm H60 - Public Economics - - National Budget, Deficit, and Debt - - - General C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
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