Impact of Tax-Rate Cut cum Base-Broadening Reforms on Heterogeneous Firms: Learning from the German Tax Reform of 2008

The German 2008 corporate tax reform followed the distinct and internationally prevalent pattern of tax-rate cut cum base broadening. Based on a new corporate microsimulation model, ZEW TaxCoMM, we assess the heterogeneous effects of the tax reform on firms, varying according to some of the firms' key characteristics. This is important for understanding the reform's implications in view of the recent economic crisis. Moreover, the model also allows for the behavioral responses of firms to a new tax environment. The 2008 reform has indeed been targeted at affecting firm behavior, in particular profit-shifting incentives. By means of a detailed reform costing, the model can investigate the extent to which the 2008 reform can actually be considered self-financing. The simulation results show that in times of economic downturn, with shrinking profitability and increasing demand for external financing, the 2008 reform might indeed exert a procyclical effect on the economy: Companies losing from the reform are exactly those that feature a low profitability, a high debt ratio, and high capital intensity. With regard to revenue consequences, the reform provisions are simulated to lead to a 19.7% decline in aggregate tax revenue. However, taking into account behavioral responses of firms with respect to their financing, investment, and profit-shifting behavior, total revenue is simulated to reach again 84.7% of the 2007 benchmark revenue, even in the short term. In a rather long-term perspective, the reform might even be 92.4% self-financing.