Local Business Taxes in Britain and Germany: Assessment of Comparative Burdens 1960–1984 by Use of the ‘Costs of Capital’ Methodology

This paper contains a review of the local systems of taxation in Britain and Germany as well as the policy debate. The main contribution, however, is to evaluate the burdens of the two fiscal systems on the user costs of capital. Comparisons are made first within each country of the burdens of local business taxes on different assets, sectors, owners, and sources of finance. Comparisons are then made between Britain and Germany over the period 1960–84 by adding progressively higher levels of standardisation: Standardised depreciation rates, inflation rates, distribution of assets and ownership, and capital allowances. From the empirical results it is demonstrated that local taxes decrease the aggregate real rates of return on investment projects by 0.6% (1960 and 1970) and 0.8% (1984) in Germany, and by 0:6% (1960), 0.7% (1970), and 1.1% (1984) in Britain. Thus, although aggregate burdens were comparable in the 1960s and 1970s, recent developments in Britain have resulted in a significant increase in local tax effects. These developments are even more strongly developed for particular assets and industries.