Germany should strengthen the equity capital of healthy businesses

by Professor Dr Eberhard Hamer, Hannover

cc. The following article takes a trenchantly critical look at the fiscal and financial measures that have been adopted and implemented in Germany in response to the corona pandemic. It is an intrinsic factor of a democracy that the effectiveness and appropriateness of these measures must also be discussed publicly, and certainly controversially. 

This can help to ensure that all those responsible – and this includes us citizens – can form a clearer picture and make appropriate step by step decisions.
Germany is on the verge of a collapse of its economy and of many companies – depending on how long and to what extent the government maintains the enforced lockdown. The government has had an “aid package” of 156 billion euros approved in the Bundestag and believes that with this, it will be able to prevent the worst from happening. Unfortunately, however, it has used an unsuitable means at the wrong time and in an unsuitable manner.
The recession has been overdue for more than a decade. In economic terms, a recession serves to correct misallocations and overcapacities (bubbles), so – like winter for nature – it is a process of recovery for the economy, in order to reduce and so regress the financial bubble, the debt bubble, the stock market bubble or the real estate bubble.
Politicians have artificially prevented such a recovery process for 20 years. If they stop the start of a correction now, this is because they want to preserve the harmful bubbles and with these also unprofitable companies and overcapacities.
The federal government started its cash injection too early and thus used it in a detrimental way. The funds will fizzle out uselessly in a mere delay of the downturn. If the money were, on the other hand, to be used later, when the economic mistakes have been sweated out, it could contribute to the recovery; but this is not possible at the present time. Thus the EUR 156 billion aid package is being spent too early and therefore ineffectively. To make matters worse, the government also intends to misuse the money:

  • The bulk of the aid package is again to go to the large corporations, even though they account for only 2% of our businesses, hide their profits mainly in tax havens and over 70% of them are in foreign hands. So the German government once again wants to subsidise dividends to international capital at the German expense. Such aid is a superfluous gift to big business at the expense of all German citizens and taxpayers.
  • The approximately 1.3 million standalone self-employed will be given 9,000 euros each – practically “Hartz-IV for the self-employed”. This in no way saves them from the big sieve of the market in the coming downturn, where the market will decide whether they survive self-employed or not. In practical terms, the state has thus introduced “Hartz IV for all”, the preliminary stage of the future “unconditional basic income” for all.
  • Small businesses with up to 10 employees will receive a subsidy of 15,000 euros. That is the cost of three employees for one month. What is the point of this? It is not a rescue, but again only a delay of the coming market selection due to the recession.
  • Who comes off the worst with this “rescue package” is the mass of small and medium-sized enterprises (SMEs). They are only offered loans, and these would increase their burden instead of reducing it. Even now, personnel companies have to pay 7% higher taxes than corporations, and of all company sizes and types, they are unfairly ripped off by having to pay the highest taxes. The loans on offer thus only delay the demise of the over-indebted companies, which will have to file for bankruptcy in the recession anyway. Good companies do not benefit from higher indebtedness, but rather from more equity capital, i.e. the “capacity building” in the form of self-financing that SME research has always called for. That is to say, the stronger the companies are financed with equity capital, the better they will survive the recession.

No other country has made such good experiences with equity capital assistance as we have. Ludwig Erhard brought about the economic miracle by considering only dividends as “profit”, i.e. by only imposing a tax on what was taken out of the business. If, on the other hand, internal surpluses were reinvested and reused for jobs, this internal use of capital was not taxed. Such “tax exemption of the profit remaining in the company” allowed companies to grow by their own efforts, to create jobs and to bring about the German economic miracle.
After the death of Ludwig Erhard, the big banks ensured that not only the distributed profit, but also every calculated internal surplus and even the entrepreneur’s salary had to be taxed as profit. Since then, we have had debt financing and equity capital problems of small and medium-sized enterprises.
According to estimates by SME research, the change in the concept of profit would result in tax losses of 45 to 55 billion euros in the first three to four years – i.e. during the crisis – which is less than one third of the federal government’s rescue package. This would therefore not only be possible, but also more useful from a fiscal point of view (letting companies keep their profits instead of first taxing them and then giving them back parts of their taxes as loans) and – as the economic miracle has shown – also the most successful intervention.
If the definition of profit as distributed profits were to be reintroduced, this would lead to the following results:

  • The most profitable businesses would become capable of also growing the most.
  • Turnover would be used to finance higher investments, more jobs and more growth instead of taxes.
  • The equity ratios of our companies would grow out of the danger zone again and companies be prepared for the crisis with equity capital.
  • The determination of profits, which is now too complicated for tax purposes, would be simplified, so as to no longer depend on the amount of depreciation, the rates of offsetting, the complicated internal company processes, but only on the easily ascertainable distributed profit.
  • The national distributions would have to be determined and taxed also for international groups of companies, so that they could no longer, by means of transfer prices, flee to tax havens with their profits.
  • The subsidies could be cancelled (approx. 50 billion euros) – 90% of which go to the large corporations anyway.

If anything, now is the right time for the imminent correction of the concept of profit.
The political resistance to this change has so far always come from the big banks – which are now themselves in respiratory distress and preoccupied with themselves – and from the ranks of the Social Democrats and the Left, which demonise any amount of entrepreneurial profit in any case, even at subsistence level. But their resistance should be appeased by the nationwide short-time work allowance and the “Hartz IV for self-employed persons” – both of which are a transition to the “unconditional basic income”, which they want.
So instead of pointlessly spending the largest amount of additional debt in our post-war history on corporate and social gifts, the government should use it to strengthen the equity capital of those businesses which are healthy, as that is the only measure that would not hinder but rather promote the process of recovery from recession and at the same time strengthen the healthy businesses for the period after the crisis.
Middle class research and some middle class associations (BVMW*, BDS** and others) have been demanding this economic miracle measure for over 50 years!     •


*  The Bundesverband mittelständische Wirtschaft (Federal Association of the Self-employed, BVMW) is a sector-neutral representation of the interests of medium-sized businesses in Germany and represents small and medium-sized enterprises and self-employed persons.
** The Bundesverband der Selbständigen (Federal Association of the Self-employed, BDS) is a cross-industry, nationwide association with headquarters in Berlin.

(Translation Current Concerns)

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