How Do Employment Tax Credits Work? – An Analysis of the German Inheritance Tax

Posted: 13 Nov 2014

See all articles by Benedikt Franke

Benedikt Franke

SKEMA Business School

Dirk Simons

University of Mannheim - Accounting and Taxation

Dennis Voeller

University of Mannheim - Accounting and Taxation

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Date Written: November 1, 2014

Abstract

Employment tax credit programs have been repeatedly used during economic crises, although their usefulness is empirically contestable. The objective of this paper is to quantify the tax effects of employment tax credit programs. A recent revision of the German inheritance tax law provides an eminent opportunity to analyze the effects caused by such a preferential treatment. The tax liability depends on a company’s future employment expenses. Hence, we use micro-level data of realized business transfers from the German Inheritance Tax Statistic and combine them with a simulation of the future development of employment over the relevant time-horizon. We identify the magnitude of tax reductions granted to business transfers under a preferential treatment. Further, we demonstrate that these reductions are considerably larger in times of economic growth. Our findings also suggest that employment tax credits have pro-cyclical effects and specifically foster transfers between unrelated parties. Finally, the preferential treatment of business transfers does not provide incentives to increase employment.

Keywords: Alternative tax treatments, Employment tax credits, Inheritance tax, Simulation

JEL Classification: C15, H30, K34

Suggested Citation

Franke, Benedikt and Simons, Dirk and Voeller, Dennis, How Do Employment Tax Credits Work? – An Analysis of the German Inheritance Tax (November 1, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-090, Available at SSRN: https://ssrn.com/abstract=2523356 or http://dx.doi.org/10.2139/ssrn.2523356

Benedikt Franke (Contact Author)

SKEMA Business School ( email )

Lille
France

Dirk Simons

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Dennis Voeller

University of Mannheim - Accounting and Taxation ( email )

University of Mannheim
Mannheim, 68131
Germany
+49 621 181 1638 (Phone)
+49 621 181 1665 (Fax)

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