The Short-Term Fiscal Effects of the Preferential Treatment for Non-Incorporations' Retained Earnings

23 Pages Posted: 21 Feb 2008

See all articles by Michael Broer

Michael Broer

German Institute for Economic Research (DIW Berlin)

Nadja Dwenger

Max Planck Institute for Tax Law and Public Finance

Date Written: February 2008

Abstract

With the 2008 reform of business taxation (Unternehmensteuerreform 2008) a preferential treatment of retained earnings for non-incorporated companies was introduced: Earnings may be retained at a preferential tax rate (29.8%) and will be subjected to supplementary tax (26.4%) when they will be withdrawn in the future. By now, studies on this topic have been based on case studies. Our article is based on microdata of the German Income Tax Statistics 2002 and provides a general empirical analysis of the new regulation's fiscal effects. Unlike studies before, we do not only consider marginal tax rates but also take into account that retained earnings may reduce progressive income tax for other earnings. Moreover we consider that taxpayers may retain earnings without having to pay supplementary taxes on these earnings if they are withdrawn within two years. On the individual level, beneficiaries of the preferential treatment are mainly taxpayers with high income. For instance, those with an annual income of at least 750,000 Euro reduce their tax burden by approximately 10% (unmarried, withdrawal before retention of 100,000 Euro). By contrast, taxpayers with an annual income of less than 22,087 Euro do not benefit from the reform at all. On the macroeconomic level, the fiscal effects of the reform are considerable: Depending on the scenario, we estimate a shortfall in receipts of 3.4 bn, 5.0 bn Euro and 7.5 bn Euro (theoretical upper limit).

Keywords: Business taxes, German income taxation, unincorporated companies, tax revenue, micro simulation

JEL Classification: H25, H32, H60, C15

Suggested Citation

Broer, Michael and Dwenger, Nadja, The Short-Term Fiscal Effects of the Preferential Treatment for Non-Incorporations' Retained Earnings (February 2008). DIW Berlin Discussion Paper No. 765, Available at SSRN: https://ssrn.com/abstract=1096152 or http://dx.doi.org/10.2139/ssrn.1096152

Michael Broer (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Nadja Dwenger

Max Planck Institute for Tax Law and Public Finance ( email )

10117
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/public_economics/public_economics_people/dwenger_nadja.cfm

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