Taxation for a New 'New Deal': Short-, Medium-, and Long-Term Options

Abstract

If there is one thing that is relatively clear about the COVID-19 pandemic, it is that governments will need new sources of revenue to offset its costs and build a better social safety net. All over the world, governments are borrowing and spending at a pace not seen since World War II, and at the same time revenues from both income and consumption taxes are falling because of pandemic related slowdowns in economic activity. The result is unprecedented levels of debt that even with low interest rates mean inevitable needs for more revenue down the road. Even a country that borrows in its own currency like the US or Japan cannot incur debt well in excess of GDP forever without risking either inflation (if it creates money to pay off the debt) or a sharp increase in borrowing costs that crowds out other government expenditures at a time when they are most needed to bolster the social safety net, which the pandemic revealed to be quite fragile in many countries including the US.

What kind of revenue sources are we talking about? Here we need to distinguish among short, medium and long-term solutions. In the short term (1-5 years), governments need to rely on immediate solutions like excess profit taxes (EPTs) on companies that benefit from the pandemic and digital services taxes (DSTs) to capture some of the increase in the use of such services that may escape regular income and consumption taxes. In the medium term (5-10 years), governments should permanently increase taxes on the rich and on corporations to address the inequality that is likely to be exacerbated by the pandemic, and adopt carbon taxes to mitigate climate change. In the long term (10 years and more), new and innovative sources of revenue may emerge like taxes on artificial intelligence, bit taxes, financial transaction taxes and others. In addition, governments of countries like the US that lack a VAT should adopt one.

Keywords: Pandemic, taxation

JEL Classification: H26