Fiscal investment climate and the cost of capital in Germany and the EU

Encouraging private investment in the EU is currently a primary goal of the European Commission. However, the effectiveness of public policies to stimulate private investment - such as a European Fund for Strategic Investments, which was recently proposed by the president of the European Commission, Jean-Claude Juncker - may be undermined by poor conditions for private investment in individual member states. In particular, the tax systems may negatively impact private investment. A key metric used to evaluate the impact of taxation on investment is the cost of capital. The cost of capital is defined as the minimum pre-tax real rate of return on an investment, given a posttax real rate of return of an alternative capital market investment. In this policy brief, we address the following questions. First, how does the fiscal investment climate in Germany, in terms of the cost of capital, currently compare to that of other member states of the European Union? Second, how has the cost of capital changed over the past 15 years? And third, what would be the effect of currently debated tax policy measures (e.g. the re-introduction of reduced-balance depreciation) on the cost of capital in Germany?