flightpaths-cross-border-tax-shutterstock.jpg

Image © Shutterstock

Since the outbreak of the Covid-19 crisis, governments have taken unprecedented action to limit the adverse impacts on their citizens and their economies. While the health situation has required various containment measures, including intermittent lockdowns, governments have implemented a range of fiscal and tax policy measures to support vulnerable households and help keep businesses afloat. In spite of these efforts, the impact of the crisis on our economies has been significant and will likely endure for some time to come.

On the bright side, the rollout of mass vaccination programmes offers hope that we may soon be on track to contain the virus and ultimately transition to a post-crisis environment. As we begin to contemplate the possibility of life beyond the crisis, now is an ideal time to begin reflecting upon the role of tax policy in a post-crisis world.

In most countries, the pandemic has placed public finances under pressure, as a result of declining economic activity, falling tax revenues and the fiscal cost of policies to address the crisis. This is pushing public debt levels to record highs, but this comes at a time when the cost of debt is at record lows. At present, with the health crisis still evolving the priority for countries remains navigating the pandemic and building a strong and resilient economic recovery. Learning from the experience of the global financial crisis of 2008, the premature withdrawal of fiscal support should be avoided, as it risks undermining the recovery. In the short to medium term, pro-growth tax policies will have an important role to play in supporting economic recovery.

“The crisis provides an opportunity for countries to re-imagine and re-design their tax systems”

Once the health crisis is over and the economic recovery is well-established, ensuring that public finances are put on a long-term sustainable path will also be important. While the fiscal pressures arising from the crisis present their own challenges, the post-crisis environment will offer an opportunity for a fundamental reassessment of our tax systems to ensure that they are ‘fit for purpose’ for the challenges of the future, including those that were evident before the crisis.

Even before the crisis, most countries faced a range of long-term challenges, such as ageing populations, rising inequality, digitalisation and climate change. While many of these existing trends have been exacerbated by the crisis, the crisis has also highlighted the need for additional government investments in resilience in areas such as health and social protection, for example. Against this backdrop, the crisis provides an opportunity for countries to re-imagine and re-design their tax systems in ways that will address these challenges as part of a longer-term effort to “build back better”.

At the heart of any such re-assessment should be the design of tax systems that support inclusive and sustainable economic growth over the long-term. In this regard, some of the areas that policy makers could consider to ensure the long-term sustainability of the tax system include:

• Measures to tackle inequality, including the opportunity to strengthen taxes on capital income, wealth, inheritances and capital gains, particularly as a result of the automatic exchange of taxpayer information.
• Aligning tax with environmental goals to support investments in clean energy technologies, as well as ensure that environmental externalities are internalised through market-based approaches, such as carbon pricing.
• Measures to support growth and innovation, including measures that ensure that the tax system encourages investments in innovation, such as R&D tax credits.
• Broadening existing tax bases and strengthening tax administration, to ensure that a country’s existing taxes are being implemented consistently, effectively and efficiently.
• Addressing the tax challenges of digitalisation, through the continued multilateral efforts of the Inclusive Framework on BEPS to secure a consensus-based solution through Pillar One and Pillar Two, as well as ensuring that VAT is effectively applied to capture cross-border supplies.
• Depending on current tax levels, a focus on increasing domestic resource mobilisation, including through simplified taxes that encourage formalisation and compliance of sole traders and small business, as well as through efforts to improve VAT systems and to utilise digital technologies to improve tax compliance and enforcement.
• Exceptional measures may be worthy of discussion in the aftermath of the crisis and could include taxes on top income earners, solidarity taxes and excess profits taxes.

While these considerations, and many others, will be important when reflecting upon the optimal tax system for the post-pandemic world, the most pressing priorities for policymakers at present continue to be navigating the crisis and transitioning into a durable economic recovery. At the same time, the actions of policymakers in reflecting and analysing the longer-term challenges to our tax systems will be critical in ensuring a quick and smooth transition to the post-pandemic world in which governments emerge from the crisis with a clear plan for reforming their tax systems to meet the challenges of the future.