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The welfare loss from differential taxation of sectors in Germany

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Abstract

In the spirit of Harberger, we apply a dynamic computable general equilibrium (CGE) model and estimate the excess burden stemming from the tax-induced distortion in the allocation of capital across the corporate and the non-corporate sectors in Germany. In doing so, we perform a counterfactual analysis and ask how the allocation of capital across sectors would change compared with a sector-neutral tax system which assures an identical effective tax burden on both sectors. Our estimates suggest that the excess burden per-period amounts to approximately 2.2 billion Euros or to about 0.1 per cent of GDP. In present value terms, the excess burden translates to about 89 billion Euros or 4.0 per cent of GDP. In order to identify the impact of the firm’s financial behaviour on the size of the emerging excess burden, we perform several sensitivity analyses with regard to debt financing, external equity financing and debt constraints via agency cost.

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Authors and Affiliations

  1. Center for Economic Studies, University of Munich and CESifo, CES, Schackstr. 4, 80539, Munich, Germany

    Doina Maria Radulescu & Michael Stimmelmayr

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  1. Doina Maria Radulescu
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  2. Michael Stimmelmayr
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Correspondence to Michael Stimmelmayr.

Additional information

The authors are grateful for the comprehensive support of Christian Keuschnigg concerning the theoretical underpinning and the numerical implementation of the model. We would also like to thank in particular Michael Devereux and the two anonymous referees, as well as several participants at the annual conference of the IIPF 2005, EcoMOD 2006 and the APET 2007, for their many insightful comments.

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Radulescu, D.M., Stimmelmayr, M. The welfare loss from differential taxation of sectors in Germany. Int Tax Public Finance 17, 193–215 (2010). https://doi.org/10.1007/s10797-009-9113-4

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