Taxes on high-income earners and corporations can help countries recover from Covid-19 pandemic, IMF says

Progressive taxation could be an option to raise additional money for healthcare, education and other public services

FILE PHOTO: The International Monetary Fund (IMF) headquarters building is seen ahead of the IMF/World Bank spring meetings in Washington, U.S., April 8, 2019. REUTERS/Yuri Gripas/File Photo
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Taxes on high-income earners and corporations can raise additional revenues to help countries recover from the coronavirus pandemic-induced economic slowdown, according to the International Monetary Fund.

Governments have taken steps to help people and firms cope with the pandemic through a range of stimulus programmes, including wage subsidies, unemployment benefits and other fiscal measures to protect jobs and stabilise financial markets.

However, more investment is needed in healthcare, education and other basic public services, IMF officials Vitor Gaspar, Michael Keen, Alexander Klemm and Paolo Mauro said in a blog post on Friday.

“Governments are now starting to focus on mobilising revenue from corporations and individuals who can best afford to pay. This revenue will help meet the extraordinary financing needs arising from the pandemic, while also promoting social cohesion in these difficult times,” the officials said.

One revenue-raising option that may be timely and attract political support is progressive taxation, they said.

“Evidence from a recent survey of 2,500 US residents suggests that the pandemic and its adverse economic consequences may lead to more favourable opinions of progressive taxation,” they said.

A tax is progressive if the tax liability, as a share of a person’s income, rises with income.

Policymakers could also consider introducing Covid-19 recovery contributions to raise the resources needed for an inclusive recovery, the officials added.

“These contributions (not to be confused with a 'wealth tax', which targets households’ net assets, such as investments like stock and bond holdings) levied on the better-off could take the form of surcharges on personal income taxes or on 'excess profits'," they said.

“The basic idea would be that those who can afford to pay more – individuals with high incomes or businesses with extraordinary profits – should make a greater contribution from their earnings.”

A number of countries across the globe introduced temporary surcharges on personal income taxes during exceptional circumstances, according to the officials. Germany implemented one in 1991 in the wake of reunification, as did Australia in 2011 following damaging floods in Queensland and Japan in 2013 after the 2011 Tohoku earthquake.

"Such a tax is typically implemented as a simple surcharge on the personal income tax and thus strengthens the progressivity of the underlying tax, while being easy to put in place."

The IMF officials also said that an  "agreement to reform international corporate taxation, making it better able to reach economic rents of highly profitable multinationals and limiting mutually damaging tax competition, should be a priority in a global economy increasingly shaped by digitalisation and automation".

"Such agreement would also help to increase revenues in a progressive manner."

Individuals who have been harmed by the pandemic are also likely to demand more redistributive policies, according to the officials.

“If their demands are unmet, these citizens may grow disillusioned and lose trust in the government," they said.

"Likewise, when the crisis has eased, if governments are perceived as having supported rich individuals and corporations more generously than those sacrificing and hurting the most, there will be a risk of political backlash or social unrest.”

Policymakers need to deliver not just on the health front but also on policies that foster more equal distribution of incomes and access to government services, they added.