Chancellor: Paying the bagpiper for the recovery in the event of a pandemic

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A restaurant worker wears a face shield and protective mask in Moscow, Russia, July 8, 2020. REUTERS / Maxim Shemetov

LONDON, July 2 (Reuters Breakingviews) – The war on Covid-19 has proven to be remarkably costly. Last year, the US federal deficit was $ 3.4 trillion. That’s almost 95% of Washington’s total tax revenue. As the crisis eases, policymakers are considering how to foot the bill, as my colleagues at Breakingviews expected during the height of the pandemic. Past wars have created new taxes. It’s time to reconsider the government’s new sources of revenue – levies that not only raise funds but repair economic and social ills.

So far, President Joe Biden’s administration has only offered to tinker with the current tax system. The White House has called for an increase in the maximum tax rates on income, companies and capital gains (capital gains tax may also become payable on estates). British Prime Minister Boris Johnson is considering a reduction in tax benefits for pensions. Given Britain’s poor savings record, a raid on pensions seems unwise. As for the proposed income tax hike in the United States, wealthy Americans are experts in avoiding that burden.

Investigative reporters from ProPublica have revealed that many of America’s richest citizens – including Jeff Bezos, Elon Musk, George Soros and Carl Icahn – have not paid federal income tax in a few years. In 2015, some 14,000 U.S. taxpayers paid more income taxes than Berkshire Hathaway (BRKa.N) boss Warren Buffett. The Sage of Omaha, who is currently worth around $ 100 billion, enjoys a relatively low income tax because he rarely realizes capital gains and Berkshire does not pay a dividend.

Corporate America is also adept at minimizing its tax obligations. The five most valuable US companies – Microsoft (MSFT.O), Apple (AAPL.O), Facebook (FB.O), Alphabet (GOOGL.O) and Amazon.com (AMZN.O) – contribute 15% of their tax profits, nearly a third lower than the statutory US corporate tax rate of 21% last year.

Income tax was first introduced in Britain in 1798, when the country was at war with revolutionary France. Although Covid-19 is a virus, not an army led by Napoleon Bonaparte, it was nonetheless a battle, the costs of which will have to be paid. Here are some new possible taxes to go around:

Wealth tax : Billionaires may find it more difficult to avoid a wealth tax than an income tax. In addition to reducing inequality, an annual wealth levy, which already exists in one form or another in prosperous economies like Switzerland and Norway, could replace capital gains and the hugely unpopular inheritance tax. The 25 richest Americans, from Bezos to eBay (EBAY.O) founder Pierre Omidyar, are currently worth $ 1.8 trillion, according to Forbes. A 2% tariff on their wealth would bring in about $ 36 billion – many multiples of what they pay in income tax. Senators Bernie Sanders and Elizabeth Warren are strong supporters of a wealth tax. But critics claim it would deter businesses and hurt small businesses.

Leverage tax: A few years ago, Martin Hutchinson, our former colleague at Breakingviews, proposed a corporate debt tax. Hutchinson argued that leverage is a source of financial instability. In recent years, companies have taken advantage of the easy money to take on more and more debt. A leverage tax would reduce debt-financed buyouts and other types of financial engineering. Instead of “imbalance”, companies would be encouraged to replace debt with equity.

AT&T (TN) is currently the most indebted US non-financial corporation with total liabilities close to $ 350 billion. If those debts were taxed at 2%, the phone company would pay nearly $ 7 billion more. Additional benefit for shareholders, faced with such an invoice, AT&T management might have thought twice before embarking on the acquisition of Time Warner in 2018, which it is in the process of unwinding.

Monopoly tax: As Adam Smith pointed out, a vibrant economy requires open competition. Yet, as Jonathan Tepper shows in his recent book, “The Myth of Capitalism,” the US economy has become dominated by corporate giants. Research suggests that companies with dominant market positions are more profitable but tend to invest less.

It used to be the job of antitrust regulators to dismantle monopolies, but in recent times they have sat idly by. A market share based profit tax would do the job more efficiently while raising tons of money. As Tepper writes, “If we have a progressive income tax because the marginal utility of money is lower for the very rich, why shouldn’t we tax corporations the same way?

Facebook currently pays around 13% of its profits in taxes. If the social media giant’s tax rate were based on its global market share, Facebook’s corporate tax rate would be more than five-fold. Founder Mark Zuckerberg would cry foul, but the company would benefit if the monopoly rents currently enjoyed by Facebook, Google and other tech giants went into the public purse.

Green sales tax: One of the main weaknesses of capitalism is that those responsible for environmental degradation often avoid paying. British-born economist and Nobel Prize winner Ronald Coase suggested long ago that the state should charge companies for “externalities”, such as pollution. Another approach would be to include environmental costs in a sales tax.

Such a tax would mimic the “sin taxes” already added to tobacco and gasoline. Thus, diesel-powered cars would be subject to a higher sales tax than electric vehicles, and the tax on intensively farmed beef would be higher than grass-fed beef. The level of the green sales tax could be related to the amount of carbon dioxide emitted during production.

As externalities are difficult to measure, such a tax would be administratively complex. In addition, any new tax may have unintended consequences. When William of Orange introduced the window tax in 1696 to pay for the war between Britain and France, homeowners responded by masking their windows. After France introduced a wealth tax in the 1980s, thousands of millionaires fled the country. President Emmanuel Macron abolished the tax in 2017. There are also political pitfalls. Margaret Thatcher’s long tenure as Prime Minister came to an end after the British public revolted against her introduction of a voting tax.

Political realities mean that few or none of these proposed new taxes will see the light of day. Instead, politicians will resort to the oldest tax of all, a tax that does not require legislation or the consent of the people. Since ancient times, states have faced the costs of war by debasing their currencies. Not much has changed in the meantime. Today central banks are busy printing money to buy government debt. An inflation tax is in sight. Even the cunning Buffett will have a hard time escaping his reach.

To pursue @Breakingviews on Twitter

Editing by Rob Cox and Oliver Taslic

Reuters Breakingviews is the world’s leading source for financial information on agenda making. As the Reuters brand for financial commentary, we dissect big business and economic stories from around the world every day. A global team of around 30 correspondents in New York, London, Hong Kong and other major cities provide real-time expert analysis.

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