Even before COVID-19, the economies of many countries around the world were in difficult conditions. Real wage growth has remained low since the 2008-2009 financial crisis, leaving millions of people in lower-paid and low-skilled jobs, especially in the service sector. Many today work in the areas hardest hit by the pandemic, such as retail and tourism.
Declining business activity and low wages have already eroded the tax base. To remedy the effects of the lockdown, the governments of developed countries were forced to provide huge emergency assistance to their economies, such as subsidies. The budget deficit is widening and millions of jobs are lost.
Governments face difficult choices about how to pay off growing debt. Decisions on how to balance the incentives for growth with the need to increase revenues can lead to restructuring of national and international tax systems, which are based on models that have changed little in recent decades.
The focus on addressing the immediate impact of the pandemic has stalled countries’ long-term economic planning and delayed fiscal reforms that could improve the long-term viability of businesses and investment in the technology and human resources needed to achieve growth.
While many problems can be addressed at the national level, some, such as taxation of digital activities, have an international component, and solving them requires a certain degree of compromise and cooperation. Securing economic recovery is vital to tackling inequality, as low-income families face growing hardship while the wealthier have used isolation as an opportunity to cut spending.
Governments face the challenge of reforming their tax systems in a way that increases confidence in a highly volatile environment and encourages companies to invest in investment projects.
Rising unemployment and a shrinking income tax base may tempt governments to shift the tax burden on corporate consumption and profits. However, there is a significant drawback to taxing corporate profits – it discourages investment. But when corporate taxation is coupled with more incentives to invest in research and development, as well as training and education, they are less likely to have a negative impact.
Poorer households spend more of their income on consumption than richer households and are therefore more prone to excise taxes. Property taxes and capital gains are another option for addressing wealth inequality and the need for greater equity in tax systems. Governments that need to reward entrepreneurs and venture capitalists may find themselves in a difficult position if they move in this direction.
It is also important to be aware of the inherent difficulties in taxing certain types of property. Intervention in well-established patterns of corporate ownership and tax control can reduce the risk of entrepreneurship and investment in areas that can benefit the broader economy.
Governments face extremely difficult choices. Much of the effort to tackle the budget deficit after the financial crisis has been achieved through spending cuts. This time, the focus should be on tax reform.