An epidemic is often referred to as a “great leveler” since viruses infect people indiscriminately regardless of their net worth. However, the economic consequences of the Covid-19 pandemic will be very asymmetric, as the draconian lockdowns to slow the outbreak hit various sectors of the economy differently.
For now, politicians have rightly avoided any discussions about how to spread the cost of the crisis, instead prioritizing higher spending to mitigate the shock. But, when the health emergency is finally over, one can expect calls for making sure the exceptional expenses are fairly redistributed to grow louder. And while it’s natural to turn to the tax system to allocate losses more evenly, it’s essential that governments think carefully about what exactly has driven inequalities during the lockdowns so that they don’t inadvertently make matters worse.
The inequalities are being brought on by individual governments’ decisions to shut down significant chunks of the economy. Businesses that have closed shop have suffered dearly while giving the rest of their community an indirect benefit, by not exposing people to the virus. Economists call this asymmetry between those who bear the costs of an action and those who gain from it an “externality” — and see it as a classic case for some degree of government intervention to balance things out.
Recognizing that’s what we are dealing with here should change how we think about redistribution. For example, a group of economists including Emmanuel Saez at the University of California at Berkeley, have called for a European wealth tax to help governments reduce their debt levels, which will inevitably increase during and after the pandemic.
However, there are many practical and conceptual problems with a wealth tax, including the risk of large-scale tax avoidance and that it would be a form of double taxation.
A better alternative would be to tax individuals and companies differently depending on how well they fared during the lockdown. The standard income and corporate tax system already does this to some extent: If I lose business during the pandemic, I will earn less income, which will lower my tax bill. But simply raising taxes on high earners could run into similar problems as a wealth tax. It could still hit those who saw a steep reduction in their income because they had to close up shop, so long as their earnings are high enough. Is it right to tax them more?
One way to adjust taxes more fairly would be to identify which sectors have been able to stay open through the crisis and ask them to contribute more. Another plan, designed by Michele Boldrin, an economist at Washington University in St. Louis, would be to place higher taxes on those whose earnings have increased or stayed the same in 2020, compared to a year earlier. There will need to be exceptions: For example, medical doctors and nurses have worked incredibly hard and put their lives at risk during the pandemic. They deserve a bonus, not a tax hike. But a surcharge hitting those who can keep their income while easily working from home would be justified.
These proposals face practical problems. Identifying who exactly should pay for the “lockdown externality” won’t be easy. Governments shouldn’t discuss any new taxes, let alone introduce them, while the world economy goes through a deep recession. Even the talk of higher taxes would prompt citizens to save more, deepening the crisis.
But if in the future governments want to use taxation to help the losers from the pandemic and to contribute more to footing the colossal public bill, they must be very careful in first identifying who the real winners are. Politicians must not to come across as the “incompetent levelers,” inflicting additional pain on top of what the virus will have wrought. Ferdinando Giugliano, Bloomberg
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