As developing countries struggle to cope with the pandemic, they risk being further slowed down by restrictive fiscal policies. These were imposed by the rich countries which no longer practice them, if they ever have. Instead, the countries of the South urgently need bold policies to ensure adequate aid, recovery and reforms.

Bold budget responses are needed

Governments must mobilize and deploy resources in a sustainable and equitable manner, in line with the Sustainable Development Goals (SDGs). With the refusal of rich countries to help more, adequate public funding is crucial.

Taxation is generally a more sustainable, efficient and responsible way to mobilize government fiscal resources. But the pandemic has imposed extraordinary demands requiring massive urgent spending.

National authorities can generate tax resources in two main ways, by collecting revenue or by borrowing. Government borrowing is generally necessary because revenues have been affected by the downturn.

Massive mobilization of budgetary resources and appropriate spending are needed to contain contagion and prevent temporary recessions, for example due to lockdowns, from turning into prolonged debilitating depressions.

Fiscal policy involves both resource generation and government spending. But the developing countries have been much more careful in their spending than the rich. The latter have introduced much bolder relief and recovery plans.

In the short, medium and long term, both public spending and taxation must be progressive. It all depends on how the income is collected and spent. We must therefore take into account both taxation and expenditure.

Less progressive taxes now

Governments must quickly develop progressive ways to finance the massive spending needed to protect both lives and livelihoods. Over the past four decades, many governments have reduced progressive direct taxation, instead of adopting regressive indirect taxes.

Higher tax rates on the wealthy have made direct taxation progressive. The regression was mainly due to lobbying by powerful elites, including foreign investors. The influential Washington-based Bretton Woods international financial institutions have made such advocacy.

The income of the rich comes mainly from assets, rather than wages, salaries or payments for goods or services. But tax rates on the highest paid incomes, as well as on property, estates and corporations have come down in most countries.

Wealth is often untaxed, or only slightly taxed at lower rates. New rules now allow you to move and hide assets abroad. It is estimated that between $ 8 trillion and $ 35 trillion are held abroad, masking the concentration of wealth and inequalities.

Taxation can reduce existing inequalities, but rarely does so despite the widely held assumption that taxes are generally progressive. Worse, most government spending is regressive, little attenuated by high profile social spending.

Difficult to measure, the impacts of the pandemic on various inequalities vary considerably. However, the vicious circle linking economic disadvantage and vulnerability has exacerbated the disparities.

Ensure progressive taxation

To be fair, taxation must be progressive. Fairer tax systems should get more income from those most able to pay while reducing the burden on the needy. The wealth tax is the most progressive way to increase revenue while reducing inequality.

Direct taxes on wealth and income are potentially progressive. Gradually higher rates and exemptions for the poor can ensure this. Low rates on investment income and assets, such as property, wealth and inheritance, can be increased. In addition to reducing inequalities, these can finance progressive spending.

Taxing windfall profits and excess profits is not only acceptable to the public, but can also raise considerable funds. Some businesses and individuals have benefited greatly from the pandemic, for example, America’s billionaires are said to have enriched themselves by more than a trillion dollars in the past year and a half.

In the longer term, progressive taxation means less reliance on indirect taxes, such as sales or consumption taxes, including value added, or the goods and services tax, which weigh much more heavily on people. low income people.

Tax evasion of the rich must also be discouraged. Companies that use tax havens to pay less can be penalized, for example by disqualifying them from all contracts with government and public companies. Tax systems can thus be made more progressive through better design and strict and fair application.

Fair take-back?

Securing a fair recovery requires urgent systemic reforms. Although it is unlikely to generate much more income in the short term due to the economic downturn, introducing such reforms now will be much easier politically.

Taxation can transfer tax resources from the rich to the needy. People living in precarious conditions, including those who are currently at risk from the pandemic and its far-reaching impacts, are in urgent need of assistance. But funding for relief and recovery provides liquidity, preventing prolonged economic contraction and stagnation.

Some pandemic relief spending in many countries has been “captured” by the politically well-connected, as political elites and their cronies seize new lucrative opportunities. These undermine not only relief and recovery, but also reform efforts.

When aid and recovery are treated as “one-off” temporary measures, they are unlikely to address pre-pandemic issues, including inequalities. Rather, governments should use the crisis to advance medium- and long-term SDG solutions.

Multilateral cooperation needed

International cooperation can help, but the Organization for Economic Cooperation and Development (OECD) for Rich Countries has long focused on tackling tax evasion abroad to secure more income.

Ten years ago he broadened his focus, but continued to insist on his own leadership at the expense of developing countries. It effectively blocked multilateral tax cooperation for decades, ignoring the strong UN mandate of various development finance and other summits.

Fair international tax reforms remain urgent. But these have been undermined by earlier reforms encouraging cross-border fund flows, allowing illicit financial flows from developing countries.

While unlikely to generate much revenue for a while, Treasury Secretary Janet Yellen’s global minimum corporate income tax proposal deserves strong and qualified support.

Developing countries need to ensure that transnational corporations are taxed better, instead of the current G7 proposal for a low rate. Income should be distributed according to where production and consumption take place rather than being limited to where sales take place.

Effectively controlling tax abuses also requires access to financial information and to common, fair and transparent rules, and not to those imposed by the rich. But such results can only be achieved through UN-led multilateralism with the participation of developing country governments on an equal footing.

Jomo Kwame Sundaram, former professor of economics and United Nations Under-Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing Frontiers in Economic Thought in 2007.

Copyright: Inter Press Service