As a result of the pandemic, many companies have suffered devastating losses, and quite a few have even been shipwrecked. The state is losing tax revenues while claims are growing. “Can our tax law cope with this catastrophe,” asked Wolfgang Schön at the digital Munich Tax Conference 2020. With the guiding principle of simultaneously lowering tax rates and prohibiting the deduction of business expenses and losses in order to expand the tax base, German tax law has been on a fair weather course since the 1980s, across all coalition changes. It treats profits and losses systematically unequally, socialises the former through taxes and privatises the latter by prohibiting deductions. It therefore favours stable returns over entrepreneurial risk, places the risk of failure solely on the loser and distorts entrepreneurial decisions. It leaves loss-making companies and their contractual partners alone on the high seas. If profits and losses were to be treated symmetrically and systematically, losses would have to be offset with a negative income tax. However, such a tax raises fears of abuse and deception. So what can be done?

How can tax policy outride the storms?

In order to navigate the state ship and the company captains through the raging seas, tax policy must react in three dimensions, says Schön: secure the liquidity of companies and cushion their losses until the storm has passed; find a solution to finance declining government revenues and increasing government spending; and finally, lead companies back into calmer waters after the acute crisis. Schön outlined the precautions taken to secure liquidity in response to the COVID-19 pandemic, which in his opinion brought quick and unbureaucratic help in the first weeks and months of the pandemic. However, he considers the measures taken to cushion corporate losses to be, though systematically important, by far not sufficient. Since the introduction of a negative tax is not realistic, as a second-best solution, Wolfgang Schön urgently suggests an expansion of the possibilities to offset current operating losses against preceding or subsequent profits. The amount up to which negative income can be carried back had been increased under the Second Corona Tax Aid Act (Zweites Corona-Steuerhilfegesetz), but it is far from sufficient for many medium-sized and large companies, according to Schön. With regard to the so-called loss carryforward, which offsets negative income against profits from later years, Schön criticises the existence of minimum taxation. This could take the wind out of the sails of companies that are just starting to regain momentum after the acute crisis. Schön refuted the often-heard argument that, especially in times of crisis, the tax authorities must be able to rely on their budget planning and that this is called into question by the offsetting of losses. Many companies will not even need any aid programs if the state expands loss carryback and loss carryforward. Instead of subsidizing companies and thus intervening in the market, the state acts like a silent partner who shares not only in the profits but also in the losses. After all, companies that do not receive compensation in a loss phase are often forced to refinance themselves on the capital market. However, under difficult economic conditions, it is much more difficult for them to obtain private loans than for the public sector. Which brings us to the question of financing.

Where should the money come from?

Wolfgang Schön argues that now it is not the time for “ideological discussions” that warm up classic issues of taxation. Whoever asks for taxes on large fortunes burdens productively used capital. Also, an early abolition of the solidarity surcharge or a reduction in sales tax is not promising, as there is currently no lack of purchasing power. Like many other suggestions, such as lowering corporate tax rates, the proposals fail to meet the needs of those affected. Whosoever does not make a profit, does not benefit from a tax cut. However, a dramatic improvement in the loss compensation rules would be a targeted measure and would help keep those companies from becoming washed up.

Frankfurter Allgemeine Sonntagszeitung also publishend an article by Wolfgang Schön on the topic:
https://www.faz.net/aktuell/wirtschaft/massnahmen-in-der-corona-pandemie-steuerrecht-fuer-katastrophen-16728215.html

September 2020