Donnerstag, Mai 05, 2005

Death of Effective Economic Policy in Germany

Hi -

The title of this post says it all.

How do you do effective economic policy? Especially in these days of restrained marginal government spending ability?

You can simply spend money on pet projects, adding to the debt and maybe or maybe not achieving your politico-economic goals. Not the cleverest way of doing things, but effective for your cronies and friends.

Or you could give tax breaks to investments in those areas where you want people to invest. No direct government outlays, no program costs. What you are doing is accepting that you'll have less government revenue on the value added by those investments in exchange for those investments.

Elegant, effective. Want people to invest in real estate in Berlin, to revitalize the run-down portions of East Germany and save in many cases some great architecture? Give investors there a tax break so that for high-value individuals it's sort of a no-brainer to invest, even if the returns are mediocre or even non-existent.

Want people to invest in ships built in Germany (as opposed to Korea or China)?
Give them a tax break to do so.

Want to support the German film industry?
Give them a tax break to do so.

Want to support wind energy farms?
Give them a tax break to do so.

It's a fairly elegant tool to implement government political-economic industrial policy. Low cost, easily manageable (the market does it, not the government). It attracts high-income people, since by investing €100T you can, in many cases, reduce your taxable income by at least that amount, if not more, meaning if you have an income of €500T, you've just saved €50T taxes, meaning you get a 50% return on your investment of €100T in the first year: for many, anything after that effect is gravy.

Downside: your money is tied up for 10-30 years, and in the case of ships or airplanes, will see heavy depreciation that will be balanced out by a revenue stream. But it's that heavy first-year tax write-off that makes it interesting: immediate reward for making that investment choice.

But no more.

The German government, in it's ***infinite*** wisdom, has decided to kill this entirely by changing §15 of the German tax code. This means that any tax break envisioned can no longer be used to compensate current income from other sources, but can only be used to compensate future incomes from that particular investment. So that investment of €100T generates a tax break of €50T that can be used against future tax liabilities from income flows from that investment.

As a high-value individual, there is no incentive to make the long-term investment.

None whatsoever.

So a government faced with really weak investments decides to kill off the best instrument for effective investment policy that it has ever had.

There is no hope for the German economy under the current administration: if anything, it's gonna take years to undo the damage.


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