INSIGHTS pieces on corona crisis
Tax relief in the time of corona: Immediacy is key
Karina Körösi, Ralf Maiterth

After an initial reluctance to consider COVID-19 a real threat, countries are now suffering the consequences of their delay. Human lives are lost and whole economies are struggling. However, the overall effect on economies is still not foreseeable. In contrast to former economic crises, which usually had a negative impact on nearly all companies, the current crisis impacts companies differently. In terms of liquidity, some lines of business are currently nearly unaffected (e.g., food retailers) or even benefit from the pandemic (at the expense of their competitors, e.g., Amazon). At the same time, a great many companies suffer notable declines in revenues and face the threat of illiquidity at short notice. In Germany, several measures have been enacted that are all directed at mitigating this liquidity shock. However, the introduced tax measures have far too little potential to significantly enhance companies’ liquidity position.

Therefore, we support the proposal by members of the TRR266 “Accounting for Transparency” to introduce two additional interventions to prevent companies from having to file for insolvency: first, extending the tax loss carryback period to more than one year. Second, even more importantly, instantly refunding the latest income taxes paid by firms (which can be regarded as a kind of immediate loss offset). The first recommendation is well-known and has proven effective in increasing firms’ liquidity when enacted by the U.S. Congress during the recessions of 2001 and 2007-09, as shown by Dobridge (2016). However, firms used the additional liquidity differently in the two recessions. Dobridge (2016) argues that after the 2001 recession, relative to the aftermath of the financial crisis 2007-09, firms faced better economic prospects and less uncertainty. As a result, they used the additional liquidity for investments rather than for increasing cash holdings or repaying debt like they did after the financial crisis. This finding might encourage policy-makers to take both of the proposed tax policy measures.

For the aftermath of the Corona crisis an extended tax loss carryback introduced in the current crisis should be maintained unchanged. Osswald and Sureth-Sloane (2018) confirm former empirical findings that both the existence of loss carryback provisions as well as the length of loss offset periods produce a positive and significant effect on risk-taking. However, the effectiveness of loss offset regulations differs across countries. Using a cross-country sample, they demonstrate that more generous loss offset provisions do not set positive investment incentives in countries with high political risk or fiscal budget risk. In countries with low political or fiscal budget risk, such as Germany, they do incentivize investment. This finding should embolden policy-makers to both ensure and communicate a sense of stability and general trustworthiness even in these times of turmoil. In the end, this might dictate how market participants perceive taxes and other policies designed to incentivize them to invest.

Although the current situation is novel for both market participants and politicians, the empirical evidence on benefits from generous tax loss offset rules should encourage German politicians to also introduce the proposed instant refund of the latest taxes paid. In contrast to other liquidity measures, such as public sector loans, the bureaucratic expenditure would be significantly lower as firms would only receive a refund of taxes already paid. This would also address concerns voiced by, e.g., the OECD regarding the potentially fraudulent use of tax relief measures. However, only firms with tax payments in previous periods would benefit from this liquidity measure.


Karina Körösi (HU Berlin)
Ralf Maiterth (HU Berlin)


Dobridge, Christine L. 2016. Fiscal Stimulus and Firms A Tale of Two Recessions. Finance and Economics Discussion Series 2016-013, Washington: Board of Governors of the Federal Reserve System. 

Osswald, Benjamin and Sureth-Sloane, Caren. 2018. Do Country Risk Factors Attenuate the Effect of Taxes on Corporate Risk-Taking? WU International Taxation Research Paper Series No. 2018-09.

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