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Study Warns Against Tax Quick Fixes For Pandemic Recovery

By Natalie Olivo · 2020-04-22 20:50:18 -0400

Lawmakers at all levels of government should clear out any tax barriers that could inhibit long-term economic growth after the coronavirus pandemic, rather than focusing on quick fixes to "jump-start" recovery, according to a Tax Foundation study published Wednesday.

The taxation approach after the outbreak shouldn't include policies that prevent businesses and people from investing and creating jobs — whether the measures are global, within the U.S. or on the state level, according to the study. Its authors noted that lawmakers should focus on clearing a path of economically harmful taxes rather than enacting policies to "jump-start" economies that have suffered as governments struggle to contain the global spread of the virus, which causes the respiratory disease COVID-19.

"Governments at all levels need to be working together to make sure that they're not implementing policies that would be contrary to a pro-growth policy mix for the recovery," said Daniel Bunn, vice president of global projects at the Tax Foundation, a right-leaning research group.

Bunn, an author of the study, told Law360 that for example, some European Union countries may enact long-term, pro-growth policies while the European Commission — the EU's executive arm — might be making contrary efforts. If these two approaches "run counter to each other on the economics, then you could see a wash" in terms of the post-crisis response, he said.

In the study, Bunn and his coauthors noted that lawmakers on all levels of government may be tempted to enact short-term policies — such as subsidies, tax rebates, payroll tax holidays and "shovel-ready" infrastructure projects. But these quick fixes "will, at best, act like a sugar high and quickly wear off," according to the study.

As for long-term policies to consider, the study cited research from economists at the Organization for Economic Cooperation and Development identifying a hierarchy of how different tax policies affect economic growth. Corporate taxes were found to be the most harmful because "capital is the most mobile factor in the economy and, thus, most sensitive to high tax rates," according to the study.

Meanwhile, the study noted that consumption taxes were found to be less harmful because they don't affect the incentives to work, save and invest. Taxes on immovable property were found to be the least harmful for growth, according to the study, which pointed out that "naturally, property can't be moved to avoid the tax."

Based on these guideposts, countries around the world should improve the tax treatment of capital investments and reduce direct taxes on workers, according to the study. Its authors added that countries should take this opportunity to restructure their revenue base to rely more on taxes that are less harmful to investment and growth while putting effort into expanding consumption tax and property tax bases.

Bunn noted that some countries are already set up for relative success by the nature of the tax systems they had in place before the pandemic.

"But other countries will be struggling to piece those things together, both to pave the way for growth, and to have sustainable public finances and make sure the revenue pockets are there for that," he said.

As another global recommendation, the study suggested the OECD suspend its current work on overhauling international tax rules — which could mean a $100 billion corporate tax increase — until the world economy returns to stable health. Business groups and Tax Foundation researchers have also expressed have also expressed this sentiment in the past.  

As for the U.S. government, the study recommended federal tax policies that focus on long-term reductions in the cost of capital. The most essential step that Congress could take is to expand and make permanent broad-based investment incentives contained in the Tax Cuts and Jobs Act that was enacted in late 2017, according to the study.  

Meanwhile, the study noted that states will be forced to grapple with depleted reserves and reduced revenues when the immediate health crisis abates. Policymakers may experience a tension between revenue needs and a desire for enhanced competitiveness, according to the study, which added that these two issues don't need to be at odds.

The study noted that state lawmakers may have to make some difficult decisions on taxes and revenues in the aftermath of the crisis. However, the authors added that "policymakers should at least regard it as an appropriate time to modernize state tax codes to make them more conducive — at any level of taxation — to economic growth and expansion."

--Editing by John Oudens.

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