income tax would equal 26% at a net taxable income of $22,000, and 43.5% at a net taxable income of $83,000.

The result is that personal income tax liabilities can be less than in the United States at upper income levels. While personal income tax collections reported from Germany approximate the same proportion of GNP as in the U. S., the German figures include more income from unincorporated business profits.

Basic depreciation rates for tax purposes are comparable to those in the United States. Either a straight line or a declining balance method may be used, but if the latter is selected, the rate may not exceed 20% of the depreciated value of the asset. Thus the aggregate cost recovery normally available to a German firm on industrial machinery depreciated under the double declining balance system would amount to about 17% in the first year, 50% in 3 years and nearly 90% at the end of 7 years. However, special depreciation allowances are available to certain industries located in Berlin and certain other border areas, for R & D and anti-pollution investments, for mining equipment and facilities and for aircraft and merchant ships.

Moreover, a German corporation may set up special tax deductible reserves against inventories and various other potential losses and liabilities. Losses may be carried forward for 5 years. The reserves and special depreciation allowances combine to reduce sharply the tax liabilities of German corporations with dynamic programs for new investment.

(3) Capital Gains

Capital gains are taxable at normal rates but tax payments on such gains may be postponed. Such gains may be used to

finance additions to certain fixed assets in the year of the gain or may be carried forward as an untaxed reserve for a period of 3 years. If used to purchase a new depreciable asset, only the cost of the asset net of such gains used for the purchase may be depreciated.

The value-added tax was introduced in 1968, replacing an earlier turnover (sales) tax. It is currently 11 percent for most transactions but is reduced to 5. 5% for professional services, food and drink, art and printed matter. By 1971, it provided a fourth of total tax collections (excluding Social Security). Specific excise taxes accounted for another 20%. Customs and import duties were equal to some 3% of the total c.i. f. value of imports in 1971.

Social Security revenues are high, running up to 25-30% of wages paid up to 25, 200 marks a year (about $9,500). The costs are shared equally by employer and employees. The gross revenues of the Social Security system amount to more than 11% of German GNP, exceeding collections of corporate and personal income tax.

The total turnover of non-financial corporations in the Federal Republic rose from $250 billion in 1968 to $360 billion in 1970. A 10% exchange rate revaluation in terms of the dollar accounted for part of the increase. Pre-tax profits plus changes in reserves equalled $17.4 billion in 1968 and $22.7 billion in 1970, equivalent to 6. 3% of gross sales and 27% of net worth in the latter year.

Taxes accounted for 48.5% of the pre-tax surplus in 1968, and 44.5% of the pre-tax surplus in 1970, close to the U. S. percentage for corporate enterprise. However, the German tax figures relate to

property and other taxes, as well as to corporate profits tax. Corporate enterprises paid about $3.45 billion in tax on income and profit in 1970, while direct taxes were reported by all non-financial enterprises at about $10 billion. As a percent of earnings before payment of corporate profit tax, the tax equalled 20-26% in the years 1968 to 1970, about half the U.S. rate.

Out of the after-tax surplus, 74% was paid out in dividends and income to owners in 1968 and 59% in 1970. Cash flow from the operations of these enterprises totalled $12. 2 billion in 1968 and $18.3 billion in 1970. Direct taxes paid by non-financial enterprises were equal to 20-30% of cash flow, compared to about 55-60% in the United States during these years.

Germany has a well developed and sophisticated banking system and an increasingly important capital market. The banks are subject to government control and review in order to protect depositors and the Central Bank conducts an active monetary policy to control the volume of credit. However, the banks are now free to allocate credit and determine the rates of interest charged to their clients. 1967, the government fixed maximum rates of interest.

Prior to

The commercial banks and savings banks dominate both the money and the capital market, accounting for two-thirds of all bank assets. Both types perform essentially similar functions, collecting deposits and making a variety of loans. They perform investment as well as commercial banking functions and may also take equity positions in business enterprises and in specialized banks. However, most of the funds of the savings banks are used to make long-term loans for housing and community construction projects. Germany also has a large network of cooperative credit banks.

The commercial banking system is dominated by 3 large banks with some 2, 000 branches throughout the country. Their assets represent almost half the total of the private banking system, the remainder being held by local and regional banks and a number of private banks corresponding to the British merchant banking system.

The system also includes a number of specialized banks. Most of them are essentially mortgage banks, with their equity held largely by one or more private banks and most of their loanable funds derived from mortgage bond issues. Five such banks are specialized in financ ing ship construction. One specializes in financing the export of capital goods.

The principal government lending institution is the Kreditanstalt fur Wiederaufbau, which finances medium- and long-term investments in sectors of particular national interest. It is owned 80% by the Federal Government and 20% by the various state governments. It finances exports as well as domestic investments and administers government credits to developing countries. Most of its funds are borrowed in the capital market with a government guarantee and must be lent at corresponding rates of interest to cover its own borrowing costs. However, it also has limited funds derived from counterpart funds of U. S. Marshall Plan aid which it uses to make special purpose loans at rates well below the prevailing market.

Problems have

The Federal Republic of Germany thus has ample institutional capability to meet the financial needs of its economy. arisen primarily as a result of the need to restrict the availability of credit in order to keep inflationary pressures in check. The deposit money banks increased their loans outstanding to the private sector from $65 billion in 1967 to over $250 billion in the fall of 1973. While

half of this increase is the result of dollar devaluation, the increases were substantial, even when measured in German currency. Restrictions on credit expansion and steeply escalating interest rates characterized the money and capital market throughout 1973.

Gross fixed capital formation has remained at a high rate in relation to most industrialized countries, about 26-27% of GNP. It increased from about $30 billion in 1965 to $67 billion in 1972. However, the share of manufacturing industry has been dropping, as investment in housing, trade and the service sector of the economy has become more important with rising living standards. While housing investment increased by almost 50% between 1970 and 1972, the business enterprise sector as a whole increased its expenditures on new investment by only 4%. Both public and private capital has been exported in significant amounts as a matter of deliberate government policy, but capital inflow to take advantage of the strong German currency has counteracted such exports.

Internal financing accounted for three-fifths or more of the capital funds of German enterprises until the mid-1960s, when the tax laws were changed to encourage the growth of a vigorous capital market. In 1968, less than 40% of the funds used for investment by German non-financial enterprises came from internal sources; in 1970 about 46.5%.

Over the 3-year period 1968-70, funds generated internally for investment increased by 36% and annual increases in equity capital were constant, but the annual increase in indebtedness doubled. Seventy percent of the additional borrowing in 1970 consisted of bank loans, two-fifths of it at short-term. While the German capital market has been receptive to bond issues, they are issued primarily by the banks. Bond issues by