What role will tax play in the economic COVID recovery?

The COVID-19 pandemic still requires governments worldwide to provide financial aid to support local economies. Many now believe that the only way these governments will be able to recoup this expenditure will be by using a variety of tax hikes. This potential tax increase across all sectors is likely to produce a quick return. Could it, however, potentially harm economies further in the long term?

According to Rob Mander from RSM International, simply increasing tax is unlikely to produce a quick fix and the complexity of the situation requires a complete reformatting of the taxation structure. Another issue looks at the increasing demand for digital services and the challenge of implementing meaningful taxation. This will require governments to think globally. After the global recession in 2008, the recovery focused heavily on higher taxes and spending cuts. Hopefully, this will lead to a period of austerity that still lingers today. The pandemic, however, has necessitated even higher levels of spending, unprecedented levels, you might say.

Corporate tax

Governments have always seen corporate tax as ‘safe income’ that’s easy to predict and grows parallel to the economy. UK Chancellor Rishi Sunak has already highlighted upcoming raises to tax but has not implemented a timeline yet. However, the lockdown has seen taxable profits collapse around the world. Thus, the logical position for many governments is to increase corporate tax to make up the shortfall. But rather than simply raising taxes and hoping for the best, there’s an opportunity here to completely change the game.

Speaking frankly – the economy needs to grow. Businesses are more likely to take bold innovative risks if they are offered tax breaks as an incentive. It might seem like a gamble to forego tax raises in a time where the government needs the money most but think of the long-term returns. This country and the global economy, in general, have been focused on short-term results for too long.

What’s the answer?

Tax plays a major role in our society and the pandemic has only underlined that fact. Without a solid tax system in place, major societal lifelines that we depend on such as the NHS simply couldn’t be there for us anymore. If it wasn’t for the UK tax system, for example, the furlough scheme that has saved countless livelihoods would never have had any legs to stand on.

If we are to move on together and grow stronger in the wake of the pandemic though, we’re going to need a combination of serious tax changes and economic stimulus. In the UK, Chancellor Rishi Sunak has certainly had his work cut out for him and there is still a long road ahead but there are certainly options.

Many have suggested a windfall tax on those businesses that have benefitted from COVID-19 and others have suggested a more severe form of wealth tax. Whatever the answer, it’s not going to be an easy one and there are certainly going to be caveats.