Merz government plans €46 billion corporate tax cut for Germany

In Germany, the new Merz government will attempt to pass a €46 billion corporate tax cut package during the summer months to pull the Eurozone’s largest economy out of stagnation.

Finance Minister Lars Klingbeil of the Social Democratic Party (SPD) is set to outline the main features of the measures at the cabinet meeting on Wednesday.

According to government estimates seen by the Financial Times, the cost of tax incentives, which include reductions for new equipment and new electric vehicles, will total approximately €46 billion by 2029, when the coalition’s term is due to end.

The draft bill states, “Following a period of economic stagnation, it is important to significantly increase the potential of the German economy.” The measures are being implemented with the aim of “giving a strong signal for Germany’s short and long-term competitiveness as a business location.”

These initiatives are in addition to a massive debt-financed public spending plan exceeding €1 trillion, aimed at modernizing Germany’s armed forces and outdated infrastructure. This plan is central to Chancellor Friedrich Merz’s efforts to revitalize the economy.

The leader of the Christian Democrats (CDU), who campaigned on a business-friendly platform, has also pledged to subsidize electricity costs for the country’s struggling manufacturing industry. Furthermore, a ministry has been established to reduce bureaucracy and accelerate the digitalization of administration.

Holger Schmieding, chief economist at Berenberg bank, commented that the planned tax cuts “will make Germany a good place as an investment location” but argued that this might be “just a beginning,” and that easing the regulatory burden would prove more challenging yet more critical.

From July 1st, companies will be able to deduct 30% of the cost of new machinery and other equipment purchased between 2025 and 2027 from their annual tax returns. Starting in 2028, the federal corporate tax rate, currently at 15%, will decrease by one percentage point each year, eventually reaching 10%.

Companies will also be permitted to depreciate 75% of the purchase price of new electric vehicles in the first year, thereby reducing their taxable income.

The government intends to introduce more advantageous tax incentives for research and development (R&D) spending.

Robin Winkler, head of German macroeconomics at Deutsche Bank, stated that the proposals would provide “a welcome short-term stimulus for the manufacturing sector.”

Merz and his coalition with the Social Democrats anticipate that the measures will be approved by both houses of parliament by the end of summer.

The Chancellor’s economic plan signals a policy shift in Germany, which until recently was the EU’s leading nation concerning fiscal discipline.

Economists caution that the threat of a 50% US tariff on European goods could push the economy into contraction this year.

According to the German development bank KFW, in the third quarter of 2024, Germany’s investment in factories, machinery, and vehicles remained 9% below pre-pandemic levels. During the same period, these investments were 11.5% higher in the US and 1% higher across the EU.

Public and private sector R&D spending was also comparatively lower than in other countries: KFW data indicates that while Germany increased its intellectual property spending by 11% relative to pre-Covid-19 pandemic levels, the US recorded a 36% increase, and France saw a 27% rise.