High earners and companies that prospered in the coronavirus crisis should pay additional tax to show solidarity with those who were hit hardest by the pandemic, according to IMF.
A temporary tax would help to reduce social inequalities that have been exacerbated by the economic and health crisis of the past year, the fund said in its twice-yearly fiscal monitor on Wednesday. It would also reassure those worst affected that the fight against Covid-19 is a collective endeavour within societies.
Vitor Gaspar, IMF’s head of fiscal affairs, told the Financial Times that a symbolic rise in taxation from those who have prospered over the past year would strengthen social cohesion even if there was not a pressing need to repair the public finances.
Countries should consider this policy as it would help boost their citizens’ perception “that everybody contributes to the effort necessary for recovery from Covid-19”, he said.
IMF cited a rise in inequality during the pandemic as younger and poorer people suffered most, being at much greater risk of losing their jobs and incomes.
Advanced economies with robust tax systems should increase their top income tax rates for a period, IMF said, citing Germany’s solidarity tax after reunification as an example.
A special excess profits tax for companies that made unusually high returns in 2020 should also be considered, the fund said.
“The symbolic impact of this type of contribution is sometimes very important . . . typically, they occur in very exceptional circumstances where social solidarity plays a particularly strong role,” Gaspar said.
The IMF’s call comes despite the fact that most countries are not facing a crisis in their public finances. Advanced economies’ debt levels are likely to stabilise after the pandemic, the fund forecasts, after rising sharply as countries battled the virus.
Countries’ heavy borrowing last year contributed to much better economic outcomes, the IMF said; advanced economies borrowed 11.7 per cent of national income, emerging countries 9.8 per cent and low income countries 5.5 per cent.
Low interest rates have helped to soften the fiscal blow of this higher borrowing in advanced economies and IMF expects the burden of public debt to stabilise in these richer countries by the middle of the decade.
It revised down its estimate of the US’s future indebtedness, despite the combined $2.8tn stimulus spending pledged by both Donald Trump and Joe Biden’s administrations since the last IMF fiscal forecasts in October.
However the world’s poorest countries will find it “challenging” to finance their debts, IMF said, highlighting this gap between nations that can borrow freely and will recover more quickly from the pandemic and those that cannot easily afford vaccines or support for social distancing.
“It's important to stress the multi-speed character of the recovery and for policies to be tailored to fit each country’s specific circumstances,” Gaspar said.
He called on countries to invest in the production and distribution of Covid-19 vaccinations, saying that was the most important immediate fiscal policy they should implement. This would cost tens of billions of dollars but should boost growth prospects sufficiently to raise tax revenues in advanced countries alone by $1tr by 2025, estimates IMF.
“Vaccination is likely to be the global investment project with the highest return ever considered,” Gaspar said.