Economic & Fiscal Policy

In October 2021, 136 countries and jurisdictions agreed on the introduction of a global effective minimum tax (OECD 2021). The plan is to impose a minimum tax rate of 15 percent on the global profits of multinational corporations (MNCs). If an MNC’s effective tax burden in a country is less than 15 percent, additional taxes will be collected until the ratio of tax payments to profits reaches a level of 15 percent. This is to affect all MNCs whose global consolidated revenue is at least €750 million.

This policy brief provides novel empirical evidence on the causal effect of increasing corporate taxes on firm investment. The study combines unique data on investment plans and their realizations of firms in the German industrial sector and data on more than 1,400 local tax changes in the specific system of business taxation in Germany. We show that firms reduce their investments if corporate taxes were increased. An increase of corporate tax rates to stabilize fiscal revenues would be especially costly during recessions. We conclude that fiscal policy should therefore avoid higher corporate taxation in times of economic crisis. Moreover, our results have implications for the op-timal design of fiscal federalism in Germany. Strong dependencies of municipalities on local business tax revenues should be avoided, as they can be very harmful during recessions.

In February 2020, the European Commission announced that it would present a plan for reforming the economic governance of the Eurozone, including the rules for public debt. The project was postponed by the outbreak of the corona pandemic, but now the reform is to come. There is a widespread demand to expand debt leeway, for example for climate protection spending. In view of the already very high national debt and rising inflation, this is the wrong way to go. Fiscal policy coordination should focus more on expenditure reallocations and thus on improving the quality, not the quantity of public spending. What is needed is a modified handling of the existing rules, not a change in the rules themselves.

This paper conceptualizes an appropriate path for fiscal policy starting from the early phase of the pandemic up to the final transition to a post-pandemic new normal. Using this yardstick, it assesses the initial fiscal response of Member States. It exploits fiscal projections and program data to analyze the adjustment to the economic recovery. For loan guarantee and short-time work schemes, it identifies program-specific parameters that improve target precision and identifies examples of more and less convincing program designs.

This paper introduces digital assets, crypto assets in general, and Central Bank Digital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis.