Once countries stabilize their fiscal recoveries amid the coronavirus crisis, they should seize the chance to rebuild their economies with green taxes and property and capital income taxation, the OECD said in a new report.
In its Tax Policy Reforms report, published September 3, the OECD noted that governments around the world have taken “unprecedented fiscal action” to respond to the economic challenges brought on by the deadly coronavirus pandemic.
Although responses vary from country to country, the majority of fiscal packages have been significant, focusing primarily on measures such as tax filing and payment deadline deferrals to ensure liquidity for businesses struggling to keep afloat, according to the report. Governments also provided income support to households with such measures as job retention schemes and greater access to social security benefits, the report adds.
As the crisis continued to unfold, many governments increased their support packages, but have recently started signaling that as countries begin entering the economic recovery phase, they will move toward expanded fiscal policy, the OECD found.
“Uncertainty around the health and economic crises remains high, but new questions are already arising,” the report says, adding that many countries have expressed interest in boosting their economic capacity to respond to future shocks to their systems.
Tax policy would play a crucial role in governments’ strategies as they try to rebuild their public finances sustainably and equitably, the report notes. However, it could jeopardize recovery if countries shift too quickly from crisis management mode to structural reform mode, according to Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration.
“Governments should seize the opportunity to build a greener, more inclusive, and more resilient economy,” Saint-Amans wrote in a September 3 blog post. “Rather than simply returning to business as usual, the goal should be to ‘build back better’ and address some of the structural weaknesses that the crisis has laid bare.”
To that end, governments should prioritize environmental tax reforms, such as greater carbon taxation, because 70 percent of carbon dioxide emissions in advanced and emerging economies go largely untaxed, according to the report.
Countries should also ensure more equitable taxation, because the pandemic has exposed the glaring inequalities that existed before the crisis began, Saint-Amans wrote. He pointed to the hardest-hit individuals, such as women, low-income earners, the self-employed, young people, and temporary and part-time workers.
“Once countries exit the crisis and economies recover, governments will start looking to restore public finances, but they may not be able to resort to traditional revenue-raising recipes,” Saint-Amans wrote. Measures that worked after the 2008 financial crisis, such as increased labor and consumption taxes, are not likely to work again, especially from a political perspective, he added.
As governments consider other revenue streams, they would be well advised to consider the taxation of personal capital income and property, according to Saint-Amans.
Even before the pandemic started, governments were already starting to focus more on property taxation compared to other years, the report notes. While other editions of the report demonstrated limited property tax changes, and others showed a mix of tax increases and decreases, the latest edition “shows a clearer trend towards increases in property taxation,” the report says.
There is room, however, for greater taxation of personal capital income, which the OECD found to be limited, according to the report.
Countries with higher corporate tax rates continued cutting those rates in 2020, further contributing to greater convergence in statutory corporate tax rates among countries, the report added.
Governments also continued to adopt tax reforms aligned with the OECD base erosion and profit-shifting project, according to the report. Meanwhile, the tax challenges of the digital economy remain a significant concern for many countries, the OECD said. Many governments are pursuing unilateral measures as negotiations continue through the OECD framework on a two-pillar proposal for modernizing global corporate tax rules for the digital age. However, trade war fears are mounting, as the United States has threatened to impose retaliatory tariffs against countries opting to pursue such measures.
“Rising pressure on public finances as well as increased demands for fair burden sharing should provide new impetus for reaching an agreement on digital taxation,” Saint-Amans wrote. “International tax cooperation will be even more necessary to prevent tax disputes from turning into trade wars, which would harm recovery at a time when the global economy can least afford it.”
The OECD report coincides with the publication of an observation from the Institute for Fiscal Studies, which urged the U.K. government to avoid increasing taxes now, but eventually consider improving tax design to raise more revenue in a relatively painless manner.
The report also comes as France on September 3 presented a massive €100 billion COVID-19 recovery plan to relaunch its economy. The plan includes a wide range of measures, including a €20 billion reduction in production taxes over two years to increase France’s competitiveness.