The entangled state: How state-business relations shaped the German corporate tax regime

Inga Rademacher

doi:10.1177/1024529420985174

Abstract

Contemporary tax research is split into two camps: comparative approaches emphasize continuity and cross-country differences, while the globalization literature stresses similar changes across countries. Counter the continuity thesis, this paper finds that neoliberal dynamics were at play in a case considered largely resilient to such dynamics: German governments implemented a series of corporate tax reforms which radically curbed business taxes and added a short-term and cost-cutting component to investments and corporate finance. While these changes point towards neoliberal change, they were distinct from the trends we see in other economies: crucially, the German reforms did not follow the common trend of reducing taxes for individuals and entailed a particular emphasis on enhancing multinational’s access to international capital – but did not liberate financial incomes from tax in general. Based on archival documents from the Bundestagsarchiv, this paper traces the process of German tax reforms and finds that neoliberal dynamics were at play but received a local (export-oriented) colour through processes specific to the German polity. Because consensual institutions granted power to a specific business coalition, radical change was long blocked. Reforms could only be implemented once the state forged a new coalition. Making sense of the mediation of neoliberal dynamics through state institutions can contribute to a better understanding of the variegated nature of neoliberalism.

Highlights

Tax systems critically shape the resource allocation between different sectors of an economy and thereby determine the type of economic growth that evolves (Haffert and Mertens, 2019; Prasad, 2006, 2012)
This paper started from the puzzle that after a long period of resilience in the German corporate tax regime, a radical reform was implemented which shifted tax support from savings banks and small and medium-sized businesses (SMEs) to multinational corporations (MNCs) and finance
Aside from the general reduction in corporate tax rates, the reforms facilitated capital-market finance of large export businesses. This distinguishes German reforms from the general trend in OECD countries, in which tax reductions for MNCs were accompanied by significant tax cuts for individuals and financial incomes

Summary

Introduction

Tax systems critically shape the resource allocation between different sectors of an economy and thereby determine the type of economic growth that evolves (Haffert and Mertens, 2019; Prasad, 2006, 2012). State actors’ dependence on certain business groups can entangle their interests with these actors: In the German, case federal states depended on the services of the savings banks These entanglements and the state’s attempt to break them up critically shaped the outcome of neoliberal reform. While liberal market economies entered ‘deregulatory liberalism’ resulting in the displacement of institutions of collective organization, the conservative Christian Democratic countries – like Germany – entered ‘dualising liberalisation’ They maintained strong levels of coordination, but the changing economic context (a rising service sector) eroded coverage and insider-outsider cleavages emerged. Once relations of the state and businesses have developed, economic policy change becomes difficult to enact because of the considerable distributional consequences of new growth strategies: they will likely strip resources from entrenched interests which will resist reform (Hall, 1986; Zysman, 1983). These semi-public institutions found considerable support in the German parliament once the conservative government proposed to curb some of their benefits to finance tax cuts for corporations

Methodology

Findings

Conclusion