A one-off levy will not solve deficit troubles

For the second year running the annual spring meetings of the IMF and the World Bank were held not in Washington but online. Nevertheless “Zoom fatigue” did not stop some interesting ideas emerging from this week’s conferences — not least the suggestion to reduce government debt loads through a one-off solidarity tax on high earners and companies that have profited from the pandemic. This proposal is a mix of the politically astute and the economically unnecessary.

First, the unnecessary. The countries that contain the winners from the pandemic — the rich world — face little trouble in borrowing to fund the response to the pandemic. Long-term debt and low interest rates mean there is little chance of the sort of imminent fiscal crisis that necessitates an immediate influx of cash. If anything, trying to raise too much tax too soon could be a drag on a recovery that is likely to depend both on wealthy households’ spending and on the companies that prospered during lockdown using their profits to invest and expand.

It could give the impression, too, that the need for a one-off show of solidarity would be solved by the payment. While the rich world will have no problem borrowing to spend right now, it does face structural challenges that will require new sources of government funding. These include issues predating the coronavirus, but also those that the pandemic has made even harder — such as paying for the pensions, health and social care of ageing populations. Funding these long-term commitments through ever-increasing debt is very different from temporary borrowing to pay for the immediate pandemic response.

The proposal is astute, though, in its unsaid implication: as the Nobel Prize- winning economist Milton Friedman used to quip, there is nothing so permanent as a temporary government programme. The spirit of solidarity can quickly fade when the moment of crisis has passed. Governments need to persuade people to contribute more even when they are not so vividly reminded of their fragility and dependence on others.

Raising taxes is hard. Presenting proposals as part of a compelling story, such as the collective experience of a pandemic or war can make it an easier sell. As Vítor Gaspar, the IMF’s head of fiscal affairs, said this week about a mooted tax on companies that have made “excess profits” during the pandemic, the “symbolic impact” of such a measure can be very important. Such symbolism could help governments to raise the more long-term and broad-based taxes that will help put the public finances on a more sustainable footing.

Friedman was right to note that history is replete with measures intended to be temporary but that have persisted. Many innovations in funding governments were meant to be a response to short-term struggles. Britain’s income tax was first introduced as a means to fund the Napoleonic wars and readopted as a transitional measure after the repeal of the Corn Laws meant the country could no longer use customs and excise duty. A Bismarck-era tax on champagne, designed to fund the construction of the German fleet, is still levied in the modern Federal Republic. 

Nevertheless, honesty will always be the best policy. Whatever political opportunity is presented by the moment of solidarity during the coronavirus pandemic, it should be primarily used to address long-term structural problems. The new US presidential administration’s attempt to unlock an international compromise on corporate tax avoidance is a good start. Governments should seek lasting solutions to other tax and funding challenges and spurn an easy quick hit on windfall profits.