Governments have rightly channelled a flood of money to our coronavirus-stricken economies. In an attempt to partly sustain worker incomes and business cash flows as a quarter to a third of the economy is shut down, they are pouring never-before-seen transfers, subsidies and loan guarantees into the private sector, heralding double-digit national deficits this year.
It is now time to think just as radically about the composition of government budgets — above all the structure of taxes — as about their size.
As we slowly lift lockdowns, curtailed economic activity will begin to pick up. But the recovery will be extremely fragile, given the damage done to businesses’ solvency. At best we will see a gradual return to full activity levels and there will be deep uncertainty about what the post-Covid-19 economy will look like — except that the status quo ante will be irrevocably gone.
We can use the tax system to ameliorate each facet of this problem. It is a challenge but also an opportunity to fashion a more efficient and fairer system.
When salary subsidies are phased out, many of the jobs saved so far will be lost after all if fearful consumers or social distancing rules mean demand recovers only slowly. An obvious way to help get people back to work is to reduce the “tax wedge” — taxes as a percentage of labour costs — such as national insurance in the UK, or more onerous social security charges elsewhere.
Permanently lower labour taxes would also encourage entrepreneurs to start up new ventures or expand existing ones in such lines of business. Not all the old jobs will remain viable, so we need new ones in sectors that can thrive in a more pandemic-resilient economy: delivery work, bicycle repair, robotics and technology support, new and remote forms of entertainment and learning, as well as perhaps a shift from quantity to quality across the board.
Many governments have temporarily reduced or deferred other business taxes, too. This is the moment to reform them for good. The UK, for example, has suspended business rates (a property tax levied on tenants) for certain smaller businesses. Even in normal times, neither it nor the equivalent council tax for households is reliably related to profits or income. Why not make the suspension permanent for all businesses and find a better replacement for both rates and council tax?
Meanwhile, some smart new taxes can be introduced. A group of European economists has proposed helping small businesses not through loans, which can leave them overstretched in the recovery, but through grants combined with a later profit surtax — in effect mimicking government equity injections, even for sole traders and family companies.
Some taxes will have to go up (especially if others are reduced) because deficits will eventually have to be reined in, and the shock of the pandemic will surely lead to changed priorities on the spending side as well. At the very least, expect a clamour for spending whatever it takes to be better prepared for another contagious outbreak.
There is likely to be strong support, too, for treating frontline workers better, above all those in the health and care sector who are sometimes at the very bottom of the pay scale.
Taxes on capital have to increase if labour taxes are cut. But higher taxes on capital income send the wrong signal when we need to trigger a recovery and investment in resilience. Net wealth taxes are a better alternative, with the added bonus of hastening the reallocation of capital from less to more productive activities.
Fixing multinational corporate tax avoidance is also overdue. Germany and France exclude tax haven-registered companies from coronavirus-related aid; others should follow suit and broaden the exclusion to benefit from taxpayers.
In addition, electorates will want to hold on to some of the unintended benefits of the lockdown. As French president Emmanuel Macron has remarked, given what we have done to contain coronavirus, why can we not take drastic steps to reduce air pollution?
That points to ambitious taxes on carbon and other pollutants, as well as congestion charges. Far from being an undue burden on the recovery, now is the best time to commit to green taxes. That would guide households and businesses charting their way back to a new normality — one in which we want people to commute less for the sake of both public health and the climate.
In normal times, tax structures and spending allocations change at a snail’s pace, and even well-intended tweaks add up to ungainly wholes over time. Today’s extraordinary situation puts within reach a tax system that is designed for the good of the economy, instead of the usual sedimentation of long-forgotten election promises. After Covid-19, we should not aim to return to how things were: we can do much better.
martin.sandbu@ft.com
Source: Economy - ft.com
