For the second year in a row, the annual spring meetings of the International Monetary Fund and the World Bank took place over the Internet rather than in Washington. However, the “zoom stress” did not stop some of the interesting insights that emerged from this week’s conferences – not least the proposal to reduce the debt burden of the state through a one-time solidarity tax on high income and companies that have benefited from the pandemic , to reduce. This proposal is a mixture of political intelligence and economically unnecessary.
First, it’s unnecessary. Countries with the winners of the pandemic – the rich world – have little trouble borrowing to fund the pandemic response. Long-term debt and low interest rates mean the likelihood of an impending financial crisis that will require an immediate inflow of cash is slim. If anything, attempting to raise taxes too early could hamper a recovery likely to depend on wealthy household spending and the businesses that thrived during the shutdown and are using their profits to invest and expand.
It could also give the impression that the need for a one-time expression of solidarity is solved through payment. While the rich world will not have a borrowing problem right now, it faces structural challenges that require new sources of government funding. These include issues prior to the coronavirus, but also issues made more difficult by the pandemic – such as paying pensions, health and social care for the elderly. Financing these long-term debt through increasing debt is vastly different from borrowing temporarily to fund the immediate response to the pandemic.
The proposal, however, is clever in its unspoken content: as Nobel Prize-winning economist Milton Friedman has always urged, there is no temporary government program. The spirit of solidarity can quickly fade when the moment of crisis is over. Governments need to convince people to make more contributions, even if they are not clearly reminded of their vulnerability and dependency.
It’s hard to collect taxes. Making suggestions as part of a compelling story, such as the collective experience of a pandemic or war, can make promotion easier. As Vitor Gaspar, Head of Finance at the International Monetary Fund, said this week about a tax on companies that made “excess profits” during the pandemic, the “symbolic effect” of such a move could be very significant. This symbolism can help governments levy long-term and large-scale taxes that will help put public finances on more sustainable foundations.
Friedman was right when he realized that history is full of actions that were meant to be temporary but continued. Many of the innovations in government funding were designed in response to short-term struggles. Income tax was first introduced in Britain to fund the Napoleonic Wars and was reintroduced as a transitional measure after the maize laws were repealed, preventing the country from using customs and excise taxes. The champagne tax from the Bismarck era, with which the construction of the German fleet is to be financed, is still levied in the modern Federal Republic.
However, honesty will always be the best policy. Regardless of the political opportunity offered by the moment of solidarity during the coronavirus pandemic, it should primarily be used to address long-term structural issues. The attempt by the new US presidential administration to unleash an international compromise to avoid corporate taxes is a good start. Governments must seek permanent solutions to other tax and finance problems and reject the quick and easy success of random wins.
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