Impact of Tax Rate Cut Cum Base Broadening Reforms on Heterogeneous Firms – Learning from the German Tax Reform 2008

The German corporate tax reform of 2008 has brought about important cuts in corporate tax rates, which were at the same time accompanied by significant changes in the determination of the tax base for both major German corporate taxes - corporate income tax and trade tax. The reform followed the distinct and internationally prevalent pattern of tax rate cut cum base broadening. Its implications are thus not unique to Germany. Especially in view of the current economic crisis, questions on the distribution of the tax burden among firms of different characteristics have arisen and still remain at the heart of the academic and political debate in Germany and other countries. In this paper we present a new corporate microsimulation model, ZEW TaxCoMM, which allows for the coherent micro-based analysis of revenue implications of tax reforms and the distribution of tax consequences among heterogeneous firms. The model processes firm-level financial accounting input data and derives the firm specific tax base and tax due endogenously in accordance with the tax code. To smooth out distortions between the sample and the population of German corporations, the sample is extrapolated on the basis of the corporate income tax statistic. The simulation results show inter alia that less than 5% of all corporations did not benefit from the reform. The average annual relief as measured by the average decline in the effective tax burden on cash flows amounts to 2.8 percentage points for large corporations and to 6 percentage points for small corporations. Furthermore, the results illustrate that firms with low profitability, high debt ratio and high capital intensity benefit least from the reform. As to tax revenues, the reform induced decrease amounts to € 9.8 billion and the trade tax gains fiscally in importance.