Home Business Peter Bofinger and Michael Hüther: This is how medium-sized businesses can be saved

Peter Bofinger and Michael Hüther: This is how medium-sized businesses can be saved

by drbyos

MThe measures that have now been adopted to contain the Corona epidemic are putting large parts of the German economy in an artificial coma, as it were, but it is completely unclear how long this condition will last. The task of economic policy must now be to shape this phase so that companies, the self-employed and the financial system can get through it as unscathed as possible.

Only then can it be guaranteed that a restart that is as friction-free as possible will be possible after the end of the protective measures. The analogy to the artificial coma shows that artificial nutrition and ventilation of the patient is required in this phase.

The liquidity policy measures previously adopted by the Federal Government are necessary and effective as the first line of defense. However, it must be taken into account that loans, even if they are designed to be low-interest and long-term, are no substitute for real income.

They increase the level of debt of companies and thus the risk of bankruptcy. In future, they will make it more difficult for companies and the self-employed to go into debt with banks. That would literally be a heavy mortgage to restart after the end of safeguards when it comes to business expansion and investment.

Measures are therefore needed to ensure the solvency of companies and the self-employed through direct transfers and the addition of equity.

Short-time work allowance is a central part of the help

Short-time work benefits play an important role for all companies, since in addition to the liquidity effect, it relieves the company of costs and thus supports solvency. The expansion and flexibility of this instrument, which has already taken place, is therefore a very important aid.

The direct grants now decided for self-employed and very small companies (with up to ten employees and a grant of up to 15,000 euros) are effective. However, the measures taken by the Free State of Bavaria are much broader here. As part of the “Corona Emergency Aid”, companies with up to 250 employees receive a grant of up to 25,000 euros.

Michael Hüther

Michael Hüther is director of the Cologne Institute for Economic Research

Source: dpa-infocom GmbH

The Economic Stabilization Fund, which is aimed at larger companies (total assets of more than 43 million euros, sales revenues of more than 50 million euros, more than 249 employees on average per year), is also helpful. In addition to liquidity support, it enables recapitalization measures of EUR 100 billion to strengthen capital to ensure the solvency of companies.

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Essen, NRW, Germany, w33

This makes it clear that there is a large gap in measures to ensure solvency. There are no targeted instruments to ensure solvency for companies with more than ten and fewer than 250 employees. In 2018 there were around 360,000 companies in Germany with ten or more employees.

They employed around 12.6 million people who were subject to social security contributions, which makes up around 41 percent of all employees. The equity ratio has risen significantly since the turn of the millennium and is around 35 percent and around twelve percentage points higher than that of small companies, but in this massive production and demand-side crisis, the corresponding capital base quickly becomes too short.

Presentation of the annual report of the Council of Experts

Peter Bofinger is a professor of economics at the University of Würzburg

Source: pa / dpa / Bernd von Jutrczenka

In addition, the roughly 15,400 companies with 250 or more employees can hardly be expected to be comprehensively and quickly supported by recapitalization measures.

A very simple procedure for direct government transfers to ensure solvency would be negative income taxes. Such a temporary instrument could be implemented with a retrospective cut in income tax for 2019 by 25 percent. This relief should only apply to income from self-employment and from business.

A 40 percent reduction would have to be considered for corporation tax due to the low tax rate. A negative tax would allow an immediate reduction in advance payments made in 2019. This measure would not be necessary for income from employment, since it is compensated by unemployment benefit and short-time allowance.

In order to avoid deadweight effects, the transfers made with this tax reduction should be repaid if the tax return for 2020 determines that the taxable income is less than 70 percent below the average for 2018/2019. This results in an analogy to short-time work and unemployment benefits. Due to the tight deadline and the average calculation, false incentives should be low.

The financial burdens of the measures proposed here can be roughly estimated. Income tax revenue in 2019 was € 344 billion. Of this, 220 billion was tax wages and 29 billion capital gains tax. The proposed tax cut would cover 32 billion euros in corporate tax and 64 billion euros in income tax. In the short term, a default of 24 billion euros would be expected, with repayments on a larger scale being likely.

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Due to the already existing possibility to carry back losses, the failures are likely to be considerably lower. A company that, for example, recorded a loss in 2020 that corresponds to the taxable profit of 2019 would already be entitled to the full repayment of the advance payment made in 2019. The procedure proposed here has the advantage that the companies are immediately relieved. In the case of loss carry-back, the relief would only take effect with the tax assessment for 2020, which will only be issued in the course of 2021 (or even later).

In the case of loss carry-back, it would be helpful, on the one hand, if the upper limit of one million euros were increased or completely abolished. In addition, the option should be examined to apply the loss carry-back not only to 2019, but also to 2018. This was possible until 1999.

We are aware of the fact that the model we propose to safeguard the livelihood of medium-sized companies will inevitably lead to deadweight effects. But in a crisis of this magnitude, that’s not our primary problem right now.

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