The federal government has employed investment allowances to promote economic renewal in east Germany. Aimed at the promotion of specific investment, the investment allowance act (Investitionszulagengesetz 1999 in the revised version from 11 June 2001) lays down what kind of investment is entitled to allowances and in which amounts. To achieve effective results, the law has very special stipulations which are meant to guarantee the proper use of the allowances. In order to quantify the cost of investment in terms of reduced tax revenue, the Ifo Institute has estimated, for 1999 and 2000, the level of investment entitled to investment allowances.
The data bases used for estimation are often inadequate due to special specific bonus patterns, i.e. the amount of the subsidy depends on its location (e.g. regions in and around Berlin), number of employees in an enterprise, on specific investment items (e.g. no investments in vehicles and software) and certain industries (e.g. market research enterprises).
To address these problems properly the Ifo Institute has conducted a number of additional surveys and has re-assessed existing ones for the purposes of this study. The results of the Ifo Investment Calculation for all Germany and especially east Germany was the framework for these valuations. With specific evaluations of diverse institutions (e.g. Bundesanstalt für Arbeit, Bundesamt für Wirtschaft und Ausfuhrkontrolle, Kraftfahrtbundesamt) some indicators and relations were generated. Nevertheless, it was also necessary to make diverse assumptions to reach the necessary grade of specification. Therefore interval estimations were often necessary.
According to the most recent estimation by the Ifo Institute (see Estimation of Expenditures for Plant and Equipment in East and West Germany for 1999 and 2000, research project by the Federal Ministry of Finance), investment in the new German Länder amounted to about DM 183 billion in 1999 (2000: DM 173.6 billion), of which a relatively modest amount of DM 43 billion was entitled to investment subsidies. In 2000 the promotion in Berlin was restricted and as a result only DM 40.5 billion was invested in the sectors which were entitled. In 1999 the corresponding forfeited tax revenue added up to some DM 4.2 billion and in 2000 to about DM 3.9 billion.
In contrast to the cost of the investment allowance act, the benefits are not sufficient if the national economic prospects of the new German Länder economy are analysed. Furthermore one of the intentions of the act was the promotion of small and medium-sized enterprises. But given the complexity of the investment allowance act, it is not attainable for enterprises that lack know-how in applying for subsidies.
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