THE MARITIME POLICY

OF THE

FEDERAL REPUBLIC OF GERMANY

I.

ECONOMIC ENVIRONMENT

The economic environment of the Federal Republic of Germany continues to show vestiges of the very successful system established in the late 1940s and 1950s to promote economic reconstruction and the resettlement of populations from the eastern regions of pre-war Germany. After maintaining a rate of growth in real GNP on the order of 10% a year in the 1950s, a 4.8% rate was achieved during the 1960s. The latter rate appeared to be consistent with the growth in productivity and prior absorption of a large body of unemployed migrants from the East. Nevertheless, a large pool of temporary foreign workers was required to sustain it. Price increases, as measured by the GNP deflator, were restrained to about 3.5% annually in the 1960s, significantly below the rate of other industrialized countries in Europe. The wholesale price index for industrial goods rose only 1% between 1963 and 1969.

Toward the end of the 1960s, growth of production began to accelerate again to the 7-8% level, but price increases began to appear at a rate not experienced for two decades. Between 1968 and 1973, the wholesale price index jumped 25%, with almost a third of that increase taking place in 1973. The government sought to restrain the inflation and GNP growth in real terms fell below 3% in 1971 and 1972. In the third quarter of 1973, German GNP was running at a rate in excess of $380 billion per year at current exchange rates, almost equal to the U.S. per capita level of $6, 100 per year.

For many years German economic policy has been influenced by an undervalued exchange rate that led to large increases in foreign

exchange reserves and the need to curb an inflow of capital seeking to take advantage of the exchange rate. Despite a series of revaluations, the Central Bank's foreign exchange reserves rose from $7 billion at the end of 1960 to more than $33 billion at the end of 1973. Even with a floating rate in 1973, Germany reported a record surplus of $4.6 billion in its overall balance of payments.

To restrain the growth of foreign exchange reserves, Germany has encouraged foreign investment by its citizens and discouraged all types of capital imports. However, the government has been reluctant to reverse the export promotion policies that fostered economic reconstruction, supported industrial expansion and permitted a rapid rate of growth of exports of manufactured products. Exchange rate changes never seemed to suffice to eliminate the growth of foreign exchange reserves. As the 1973 oil crisis capped a year of rising domestic prices and floating exchange rates, the German balance of payments surplus was reversed after September, 1973. By the end of January 1974, reserves had declined by more than $3 billion, and the deutschemark had fallen again in value relative to the dollar. Restrictions on capital imports were eased in February, 1974 and reserves began to increase again.

A. Tax Systems and Rates

The German tax system and rates are comparable in many essential respects to that of the United States. Both countries collect a volume of taxes each year that accounts for about 22-23% of GNP. Both have corporate tax rates around the 50% level and have steeply progressive tax rates on personal income that yield a sum to the government equivalent to about 9% of GNP. However, some important differences also exist. (1) Corporate income tax collections averaged 3.3% of GNP

in the United States in 1970 and 1971, while they averaged only 1.65% of German GNP. However, other taxes paid by corporate enterprise in Germany appear to account for sums that are twice as large as the tax on corporate profits. (2) Germany has a much lower tax rate on corporate earnings that are distributed to shareholders. (3) German taxes on goods and services, including its value-added tax, are a much more important source of government revenue than U.S. sales and excise taxes. (4) Property taxes are a much less significant source of revenue in the German system.

The German tax system was revised in the early 1950s, for the express purpose of supporting the market for corporate securities by offering significant after-tax income from dividend receipts to lower income individuals and encouraging the distribution of earnings by corporate enterprises. Special reserves and tax deferments on corporate capital gains help to finance part of corporate new investment and special depreciation allowances encourage the diversion of investment to certain sectors of the economy where the national interest is deemed sufficient to warrant special treatment. The relatively high corporate tax rate on retained earnings (almost 53%) particularly encourages reinvestment of cash flows that are exempt from tax if reinvested.

Unlike the U. S. and many other countries, Germany requires business firms to depreciate for corporate reporting purposes on the same basis as for tax purposes. Thus the annual reports of German firms may understate the value of their underlying equity, presenting higher debt/equity ratios and rates of return on equity than would result from U.S. accounting practice.

(1) Tax Rates

Corporate income is taxed at the rate of 51 percent on undistributed earnings and 15 percent on distributed earnings. A 3% surcharge had been added to the tax amount, but a 10% surcharge has now been introduced in order to restrain further the strong inflationary pressures in the economy. Pre-tax profit used to pay tax on distributed earnings is taxed at the undistributed rate. Thus the incidence of corporate tax liability has been 52.53% on distributed earnings and 24.5% on undistributed earnings. The split rate on corporate profits was introduced in 1953 in order to encourage the expansion of an active capital market, to reduce reliance on retained earnings for investment and thus to improve both the quantity and quality of corporate investment.

Corporate capital gains are taxed at regular rates if they are not invested in new fixed assets. Taxes are paid quarterly on the basis of the previous year's income, with the final payment falling due one month after the revenue service has issued its final assessment. This usually means between the last quarter of the succeeding year and the middle of the following year. (The final payment of 1972 tax would be paid between September 1973 and July 1974), 6 months to a year later than in the U.S.)

Personal income tax is paid in accordance with a system comparable to that of the U. S. Dividends are taxed as ordinary income less a small standard deduction. Capital gains are also taxed at normal rates except for gains from the sale of a business. Rates are steeply progressive, but an elaborate system of deductions and exemptions may be applied to arrive at taxable personal income. Thus a gross income of $65,000 can lead to a net taxable income of $55, 000 and a tax of less than $20,000, an effective rate of 30 percent on gross income, or 35 percent on net taxable income. For a married couple with two children,