Montag, November 28, 2005

A Modest Proposal

Germany, as we all know, is in the doldrums and has been for the last several years.

A modest proposal, based on this.

Germany's problem is the tax burden: the real return on investments is, after taxes, too small. This is not only true for companies, but for private households as well. If I get taxed at the highest marginal rate, any significant increase in my pay is eaten largely up by taxes, reducing my marginal inclination to invest more time and energy to move ahead in a job or with a company. After reaching a certain level of income, the returns on further investment of time are too small for them to be worthwhile, since leisure time, always at a premium, can't be banked for future periods.

Germany recently gave up an excellent macroeconomic tool: the investment tax credit, since recent code had been so poorly written that instead of German investors getting a tax break by investing in German films, they got a tax break by investing in films anywhere. Instead of getting a tax write-off for ships built in Germany, they got one for ships built anywhere. Given the high cost of manufacturing in Germany, there wasn't much surprise when people realized they could just as easily invest in ships built in China as those made in Germany and get quite a better return on their investment as a result. At the end of the day, the investment tax credit ended up making things worse rather than better, since fund initiators provided relatively elegant and simple investment tools for an investor looking for an easy way to get some tax relief fast.

So investment tax credits were virtually eliminated and in at least one case led to the bankruptcy of closed fund initiators who didn't think that the law would change so drastically and were caught overextended and underfunded.

So here is the modest proposal: reinstate the investment tax credit and have a government team of economists make the decision where these indirect subsidies should go. Not to support aging and dying industries, but rather to open up new ones: how about an investment tax credit for Nanotechnology funds where an investor gets to write off 150% of his investment in the first year for any sum over €25 0000? The subsidy for €25 000 invested would be, at the top marginal rate, something like €15 000, which at first sounds like a lousy deal for the government. But limit these investments to closed funds, where the capital is not fungible for at least 10 years, ensuring that an investor can't yank his money out quickly, and the net effect should be positive, based on income tax from new jobs, corporate tax from new companies and tax income on dividends paid over time. Make it a requirement to have a clear and clean entry and exit for an average investor, and you've created an investment instrument that allows the government to decide which areas it wants private investors to finance, rather than direct government money.

Make this council of economists permanent with 11 members, 1 of whom makes the decision at the end of the day, with a rotating membership of 3 years, with 3 government economists, 3 private industry economists, 3 institutional economists and 2 foreign, non German-born economists. Investment recommendation by majority only, with a "White Book of Industrial Development" published every three years that covers a) success stories and why and b) failure and why. The chairman, who makes the decisions at the end of the day, may not be a government economist. The only allowable investment instrument is closed funds, 10 years with clear entry and exit procedures (i.e. at the end of 10 years, investors know how much they should be getting back, ceteris paribus), and no secondary markets. Investment tax credit of between 100% and no upper limit in the first year, providing investors with a massive incentive to invest. But at the same time these funds are limited to the areas chosen and there must be an approved business plan for the fund that shows a real return on capital over time, at the very latest 10 years. No black box here, but rather business plans that fit into a standardized template for comparability. Limit funds to total subscription of no more than €1000 mn, minimum of €10 000 entry, no single investor with more than 30% of total funds equity.

And eliminate all other subsidies. If companies want to gain access to this kind of long-term risk capital, then they have to enter into competition with new technologies and new ideas in order to get access too this kind of money.

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