EconPol Policy Briefs

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Corporate Taxes Reduce Investment: New Evidence from Germany

Sebastian Link, Manuel Menkhoff, Andreas Peichl, Paul Schüle

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.

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How Dependent Is Germany on Raw Material Imports? An Analysis of Inputs to Produce Key Technologies

Lisandra Flach, Isabella Gourevich, Leif Grandum, Lisa Scheckenhofer, Feodora Teti

The Ukraine war and geopolitical tensions pose major challenges for supply chains. Whereas shortages of microchips became a symbol of supply chain disruptions during Covid-19, a survey from June 2022 from the ifo Institute shows that over 74% of German manufacturing firms report production disruptions due to shortages of different types of inputs and raw materials. The production of key technologies that are necessary, for instance for the energy transition, often depends on imported raw materials. Therefore, it is important to evaluate Germany’s raw material dependencies at the product level to identify the risk of future supply chain disruptions. This paper identifies nine critical raw materials, which have a high degree of supplier concentration and are used in more than half of the key technologies. For these raw materials, we provide a detailed analysis on Germany’s dependency on imports.

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Reforming Economic Governance in the Eurozone: Shifting Spending Instead of Expanding Debt Margins

Clemens Fuest

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.

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Cutting through the Value Chain: The Long-Run Effects of Decoupling the East from the West

Felbermayr, Gabriel J. / Mahlkow, Hendrik / Sandkamp, Alexander

This Policy Brief analyses the long-run effects of an economic decoupling between the political West (i.e. the EU, the US and their allies) and the East (first and foremost Russia and China). A decoupling of Russia from the US and its allies would have much more severe long-term impacts for real income in Russia (minus 9.7 percent) than in the US and its allies (minus 0.2 percent). The reason for the uneven distribution of costs lies primarily in Russia’s low economic importance compared with the US and its allies.

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The Recovery and Resilience Facility: A Springboard for a Renaissance of Public Investments in Europe?

Francesco Corti, Daniel Gros, Tomas Ruiz, Alessandro Liscai, Tamas Kiss-Galfalvi (EconPol Europe, CEPS) David Gstrein, Elena Herold, Mathias Dolls (EconPol Europe, ifo Institute)

The funds provided by the Recovery and Resilience Facility under the National Recovery Resilience Plans are supposed to finance new projects to supplement, not to supplant national efforts. This is also called additionality which has long been a key principle of the EU cohesion policy. According to this principle EU financial intervention should not substitute for national funding that would have been used in the absence of EU intervention. The purpose of this short contribution is to shed light on the additionality of public investments under the Recovery and Resilience Facility. To this end, the authors propose to look at additionality both from a macro and micro perspective. They apply the micro approach to four national recovery and resilience plans: Italy, Germany, Belgium and Austria.

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