An epidemic is often referred to as a “great leveller” 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 prioritising 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.
Hurting them more
In normal times, the classic way to think about redistribution of income and wealth is that it’s only fair that those who earn more or own more contribute more to pay for public services such as health care and education. Their tax payments also help fund state payments to those left behind — for example in the form of unemployment benefits. And while governments around the world hold different views over the appropriate level of these adjustments, most of them will agree that this principle is right.
The issue at the heart of the Covid-19 pandemic is somewhat different. 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.
Carrying an unequal share
Recognising 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. But the biggest issue in this case is that it would address the wrong form of inequality: Even rich people can bear a cost from restrictive measures aimed at flattening the coronavirus curve.
For example, a relatively wealthy entrepreneur who has stopped a factory because of the lockdown would be paying twice to support the common good — first via the missed production, and second via the wealth tax. Conversely, an asset-poor public sector worker who has stayed at home safely during the pandemic, without any risks of losing his or her income or job, would not be paying at all.
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.
Some way to differentiate
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 levellers,” inflicting additional pain on top of what the virus will have wrought.