The way in which capital is taxed influences business financing decisions. Whether a company funds a new project out of retained profits or whether it raises external equity or debt capital, is in turn relevant for its economic performance. So, for instance, the traditional debt bias of corporate income tax systems has been blamed for deepening the global financial crisis by rendering companies more vulnerable to economic shocks.
In his article, Röder first observes that Germany does not have a coherent tax policy in place when it comes to the taxation of income from capital. In the context of the last major overhaul of business taxation in 2008, the draftsmen paid lip-service to neutrality, but the reform left the tax system heavily tilted in favour of debt. It is not evident, which ideal tax policy should pursue. Mainstream public finance literature still suggests that the normal return on capital should not be taxed at all, but this policy recommendation has become more contested in recent years. If income from capital is taxed, there is a strong case for neutrality and against favouring one source of capital over the other.
Finally, the article examines different options for reforming the taxation of income from capital, including innovative concepts such as a comprehensive business income tax and an allowance for corporate equity, and arrives at the conclusion that a dual income tax would be the best way to reduce distortions without causing major disruptions to the tax system.
Published: Sieker, S. (ed.), Steuerrecht und Wirtschaftspolitik (DStJG Volume 39). Köln, 2016, pp. 307-360.