A prominent Swiss economist's suggestion that the government consider raising taxes on the corporate “winners” of the COVID-19 pandemic to support companies that have suffered is being panned by many of his colleagues.
'We could consider taxing the profits of the crisis winners higher, and using that money to support the losers of the crisis,” Jan-Egbert Sturm, director of the KOF Swiss Economic Institute and head of the economics experts group of Switzerland’s COVID-19 task force, said in an August 30 interview with the SonntagsBlick newspaper. Among the winners Sturm singled out are supermarkets, online shopping platforms, and pharmaceutical companies. The losers include food service, lodging, and travel businesses.
"In contrast to the financial crisis, where politicians, banks, and economists made mistakes, event organizers, travel, gastronomy, and hotel businesses have got into financial difficulties through no fault of their own," Sturm said.
The issue of how governments worldwide will fund the costly relief programs intended to offset the crippling economic effects of COVID-19 remains largely unanswered. However, several Swiss economists contacted by Tax Notes said raising taxes on companies that have profited from the pandemic is not the solution.
Christian Keuschnigg, a professor of public economics at the University of St. Gallen, said businesses constantly take risks that have both positive and negative outcomes. “Profits in good times must compensate the losses in bad times,” he said. “In the COVID crisis, some firms make large profits, but that’s because they offer something very valuable that is suddenly in huge demand. These profits are necessary for firms to scale up supply and divert resources from other uses. The very same firms may face other risks in the future where they might lose.”
Keuschnigg said the government shares in those risks through corporate tax, earning exceptionally high revenues when profits are high and collecting no revenues when profits decline. “So, the lucky ones pay the chunk of corporate tax revenues anyway,” he said. “That’s enough; there is no need for a special surcharge. The government should not discourage risk-taking of private firms by taxing away the good outcomes.”
The government should take the concept of risk sharing seriously by allowing loss carryforwards or even paying out negative taxes when profits turn into losses, Keuschnigg said. “That’s the nature of sharing in a firm’s profit,” he said.
Pierre Bessard, vice chair of the board of trustees of the Liberal Institute, a Swiss think tank, and member of the scientific council of its Center for Tax Competition, also disagreed with Sturm’s suggestion. “Businesses cater to demand according to consumer preferences, in normal times as in times of crisis,” he said. “Government intervention in such processes merely distorts necessary entrepreneurial adjustments and generates highly problematic distributive conflicts. Who, for example, would determine the ‘winners’ and the ‘losers’? On what grounds? From a mechanical, purely mathematical standpoint, such an idea might make sense, but in the dynamic, entrepreneurial, and innovative real business world, it is bad thinking.”
None of the economists contacted by Tax Notes thought the Federal Council and the parliament are likely to approve a tax on pandemic winners to help out the losers. “Swiss politicians are usually skeptical about biased market intervention and special regimes,” Keuschnigg said. “It would also be complicated to separate the firms who must pay an extra tax, and identify the losers, leading to arbitrary treatments in some cases.”
Marius Brülhart, a professor of economics at the University of Lausanne, said there is no need “as yet” for additional tax financing. “This discussion strikes me as premature,” he said. “The Swiss debt-to-GDP ratio will remain below 50 percent this year, and borrowing rates for the government are negative. If the pandemic were to drag on and require additional lockdowns, then future tax increases might become an issue, but it is entirely possible that we’ll get through this without requiring any corona taxes in the future.”
To fund relief spending, the government must take on debt and then reduce the excess through a prolonged process of budget consolidation, spending cuts, and higher taxes — “possibly [increasing] the profits tax, but probably more by higher indirect consumption taxes, which are exceptionally low in Switzerland by international comparison," Keuschnigg said. "This way, the government stretches a huge one-time cost over many years and generations, as it should be.”
Bessard said the government should lower business taxes “across the board to nil” to deal with the economic cost of the pandemic and stimulate future economic growth. “Business taxes on profit and capital are generally considered the most harmful, given that they are levied on productive resources likely to be reinvested,” he said. “Besides, the costs of business taxes are always borne indirectly by real people, whether it be the customers, the employees, the suppliers [or], to a lesser extent, the shareholders of the company.”
Apart from satisfying sudden liquidity needs through special credit arrangements, Keuschnigg said the biggest challenge from the pandemic for policymakers comes from the sudden increase in debt levels across the economy. “First, by the additional emergency credit loaded on top of preexisting debt, and second, because the loss of revenues . . . eats up equity capital,” he said. “Usually, equity capital is accumulated by retained earnings, but that’s a slow process.”
To speed up the recovery, the government should do everything it can to improve access to external risk capital like private equity through the issuance of new shares to bolster investment spending, Keuschnigg said. “Usually, firms are hesitant to take new shareholders on board, so the government would have to create appetite for that. My favorite suggestion is the introduction of a notional interest deduction for equity capital in parallel to the deduction for interest on debt," he said. "This measure would do away with the tax bias in favor of debt relative to equity financing.”
In a 2019 referendum Swiss voters approved a sweeping corporate tax reform bill that included a notional interest deduction on excess equity. The deduction applies only to companies that are tax resident in the canton of Zurich.