Fighting International Tax Avoidance: The Case of Germany

There is broad agreement in theoretical work that taxes on capital income are bound to cease when markets become fully integrated. In particular, high-tax countries should be concerned about tax competition, and empirical evidence on the working of tax competition should be found most easily by looking at countries with traditionally high tax rates on capital income. In this respect, Germany is a good candidate for closer examination. Throughout the 1980s, it had the highest statutory corporate tax rate of all major industrial countries (see Figure 1). This makes it worthwhile considering recent German tax legislation and evaluating the extent to which international tax competition was responsible for new tax law amendments. In doing so, the emphasis is on corporate taxation. In recent years, Germany has introduced various legislative measures in the field of corporate taxation. This activity is not at all surprising. Large German multinational corporations, in particular, have recently almost ceased to pay profit taxes to the German government. In the years 1990 through 1993, many big companies achieved reductions in the average tax rate on profits although an additional surtax on the corporate tax (not shown in Figure 1) had been introduced on a temporary basis to finance German unification. Well-known