{"id":2245,"date":"2020-09-14T12:49:48","date_gmt":"2020-09-14T11:49:48","guid":{"rendered":"http:\/\/blogs.cardiff.ac.uk\/business-school\/?p=2245"},"modified":"2020-09-14T13:09:05","modified_gmt":"2020-09-14T12:09:05","slug":"we-need-more-progressive-taxation-and-a-wealth-tax-to-pay-for-the-covid-19-rescue-packages","status":"publish","type":"post","link":"https:\/\/blogs.cardiff.ac.uk\/business-school\/we-need-more-progressive-taxation-and-a-wealth-tax-to-pay-for-the-covid-19-rescue-packages\/","title":{"rendered":"We need more progressive taxation, and a wealth tax, to pay for the COVID-19 rescue packages"},"content":{"rendered":"\n
\"\"
We may expect that a successful fiscal intervention will eventually lead to an increase in inflation, if not now, then during the economic recovery. <\/figcaption><\/figure>\n\n\n\n

The cost of COVID-19 rescue packages will likely be partly financed by increased inflation, which will disproportionally affect less-affluent people and workers, including frontline NHS staff. <\/h3>\n\n\n\n

Dr Wojtek Paczos and Dr Pawe\u0142 Bukowski (London School of Economics) argue that to spread that burden more equitably, governments should consider an increase in progressivity of income taxes and an introduction of a temporary wealth tax.<\/p>\n\n\n\n

The return of inflation?<\/h3>\n\n\n\n

The COVID-19 crisis has resurrected the debate on inflation.\nThere are good reasons to believe that it might return soon. First, the\nlockdown measures induced sharp contractions in both aggregate supply and\naggregate demand. Although both harm production and employment, they have\nopposing effects on prices \u2013 demand contractions reduce, while supply\ncontractions increase inflation. These effects are unbalanced across the\nsectors of the economy. The fall in the measured inflation in April and May\n2020 was mainly driven by deflation in transport and clothing and a slowdown in\nthe housing sector. This is unprecedented and likely temporary since transport\nand housing sectors were the largest contributors to the Consumer Prices Index\nincluding owner occupiers\u2019 housing costs (CPIH) inflation over the past ten\nyears. At the same time, measured inflation in food and recreation and culture\nincreased (ONS, June 2020).<\/p>\n\n\n\n

Additionally, the lockdown measures induced large changes in\nthe composition of the consumption basket. Some items are simply unavailable to\npurchase \u2013 almost 15% of a typical CPIH basket (ONS, May 2020), but some\nalthough still available (petrol) are purchased considerably less. Thus, Dixon\n(May 2020) argues that in the UK the official CPIH index is likely\nunderestimating the true inflation.<\/p>\n\n\n\n

Second, massive fiscal interventions in the UK and the rest\nof the world alike rely on national (and union-wide) central banks providing\nadditional emergency liquidity. In the UK, this has even taken the form of the\ndirect monetary financing of the government by the Bank of England. If\nsuccessful, the fiscal intervention will mechanically increase the amount of\nmoney in circulation. The demand, however, cannot increase in tandem due to the\nlockdown measures. This, according to the quantitative theory of money, will\nlead to higher inflation: \u201cWhen stocks and inventories run low, the price\nsystem will match the dampened quantities and stimulated spending in the usual\nway. Prices will rise.\u201d (Baldwin, March 2020).<\/p>\n\n\n\n

Third, when the lockdown is lifted, the demand will recover.\nGoodhart and Pradhan (March 2020) argue that since this will happen following a\nperiod of massive fiscal and monetary rescue packages, it may lead to a surge\nin inflation of more than 5%. Roach (May 2020) suggest that this may be\nexacerbated by the disruptions of global supply chains and the return of\noff-shored manufacturing. If this becomes the \u201cnew normal\u201d, it will mean higher\ncosts of production and higher prices for final products.<\/p>\n\n\n\n

We may thus expect that a successful fiscal intervention\nwill eventually lead to an increase in inflation, if not now, then during the\neconomic recovery. This will be good news \u2013 stable or falling prices would be a\nsign that the fiscal policy has not used its full potential.<\/p>\n\n\n\n

Who pays the inflation tax?<\/h3>\n\n\n\n
\"\"
The middle class is more exposed to inflation as their spending increases relatively more when inflation strikes. <\/figcaption><\/figure>\n\n\n\n

Inflation, regardless of whether it will be accurately\nreflected in the CPIH or not, is as a form of wealth and income tax. It reduces\nthe value of savings and wages in consumption units. Thus, the rescue package\ncan be viewed as a redistribution tool: a transfer to the crisis-hit parts of\nthe economy paid for by inflation and future taxes.<\/p>\n\n\n\n

Inflation is not as an egalitarian tax, as it may seem. It\nmostly affects three overlapping groups. The first group are the workers whose\nwages do not rise as fast as inflation. Those include key-workers from the\npublic sector (nurses, doctors, first responders, teachers), whose nominal\nwages have been essentially frozen since 2010 due to austerity measures (Dolton\n2017). Unless inflation is counterbalanced with the rise in the minimum wage,\nlow- and mid-skilled occupations from the private sector will also be affected.\nThis is hardly a new phenomenon \u2013 since 2007 the real median wage in the UK has\ncontracted by 3%, the largest fall in Europe after Greece (Costa and Machin\n2019). The record-low levels of unionization (Farber et al. 2018) and very weak\nbargaining power of workers (Bell et al. 2018) suggest that this phenomenon\nwill continue also after the COVID-19 crisis.<\/p>\n\n\n\n

The impact of inflation depends depending on the composition\nof the consumption basket. Households that consume goods and services with\nstickier prices, such as tuitions, childcare or luxury products, are relatively\nshielded from the general rise of prices. The recent research on US households\nshows that those are mostly high-income people (Cravino et al. 2020). On the\nother hand, the middle class is more exposed to inflation as their spending\nincreases relatively more when inflation strikes.<\/p>\n\n\n\n

Finally, inflation matters more for people who mostly keep\ntheir savings in regular bank accounts. These offer historically low nominal\ninterest rates and do not shield savers against inflation. Those are mostly\nfrom low and middle classes. Affluent people possess relatively more real\nestate and business properties, as well as financial products, returns on which\nhave historically over-compensated for inflation (Crowe 2005, Piketty 2020).<\/p>\n\n\n\n

Thus, inflation is a regressive wealth and income tax \u2013 the\nlower the income the higher proportion of it is taxed away by inflation. This\nburden also disproportionately falls on frontline workers. What can be done to\nspread the cost of rescue packages more equitably?<\/p>\n\n\n\n

Progressive income and wealth taxes<\/h3>\n\n\n\n
\"\"
A wealth tax is a tax on the past, rather than the future streams of income. It does not distort consumption, savings, labour supply or investment decisions.<\/figcaption><\/figure>\n\n\n\n

We propose a two-fold solution. First, to shield frontline\nstaff against inflation, their wages should be increased. This should be a part\nof a wider package of boosting spending on the NHS. The coronavirus crisis has\nproved, that healthcare should not be treated as an expenditure, but as an\ninvestment. An investment that could have saved the economy.<\/p>\n\n\n\n

Second, those new expenditures, as well as the new public\ndebt that is financing the rescue packages, could be partly paid off with a new\nprogressive tax levied on those, who survived the crisis relatively unscathed.\nThis could take the form of a wealth tax on the net worth of the top 1% richest\nindividuals. Landais, Saez and Zucman (April 2020) put forward a proposal of an\nEU-wide temporary progressive wealth tax with three rates: 1% of net worth\nabove \u20ac2m (\u00a31.75m), 2% above \u00a38m (\u20ac7m) and 3% above \u20ac1bn (\u00a3870m). They estimate\nthat this new tax would pay off the new debt of a size of 10% of GDP after 10\nyears.<\/p>\n\n\n\n

This solution has two key advantages. Since the wealth of the most-affluent is also in substantial parts liquid, nobody will be required to sell illiquid assets (eg. their house) to pay the tax. For instance, securities and cash constitute more than 40% of the gross capital value of estates with a net value above \u00a31 million (ONS 2019). Secondly, a wealth tax is a tax on the past, rather than the future streams of income. It does not distort consumption, savings, labour supply or investment decisions. Such temporary wealth taxes were introduced in many countries after the World Wars, for example, Germany, Japan, and Poland. The UK almost introduced a permanent wealth tax during Labour governments of Harold Wilson and James Callaghan in 1974-1976.<\/p>\n\n\n\n

Milton Friedman famously said that there is no such thing as\na free lunch. Rescue packages are a necessary policy tool in the current\ncrisis, but they do not come for free. It will be costly to save the economy\nand those costs, sooner or later, will have to be paid off in the form of\nincreased taxes. The equitable spreading of this burden in the future is as\nimportant as the details of the rescue packages today. Without it, the costs will\ndisproportionately fall onto those, who already are paying the highest price\ntoday.<\/p>\n\n\n\n

Dr Wojtek\nPaczos<\/strong><\/a> is a macroeconomist and lecturer at Cardiff Business School\nand at <\/strong>the Institute of Economic Sciences\nof the Polish Academy of Sciences<\/strong><\/a>.<\/strong><\/p>\n\n\n\n

Dr Pawe\u0142\nBukowski<\/strong><\/a> is a researcher and lecturer at the <\/a><\/strong>Centre for Economic Performance, London\nSchool of Economics and Political Science<\/strong><\/a> and at the Institute of Economic Sciences of the\nPolish Academy of Sciences.<\/strong><\/p>\n\n\n\n

This article was originally published on the LSE COVID-19 blog<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"We may expect that a successful fiscal intervention will eventually lead to an increase in inflation, if not now, then during the economic recovery. The cost of COVID-19 rescue packages […]","protected":false},"author":1820,"featured_media":2252,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[1431],"tags":[418,1060,28,100,1690,1312,115,499,166,1687,222,1689,1054,1693,1692,1475,1403,45,1316,109,1691,1685,437,1686,1426,1688],"class_list":["post-2245","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-covid-19","tag-austerity","tag-bank-of-england","tag-cardiff-business-school","tag-cardiff-university","tag-consumer-prices-index","tag-coronavirus","tag-economy","tag-employment","tag-eu","tag-frontline-workers","tag-government","tag-income-tax","tag-inflation","tag-institute-of-economic-sciences-of-the-polish-academy-of-sciences","tag-key-workers","tag-lockdown","tag-london-school-of-economics","tag-nhs","tag-pandemic","tag-productivity","tag-public-sector","tag-rescue-packages","tag-tax","tag-taxation","tag-wages","tag-wealth-tax"],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/paOfaS-Ad","meta_box":[],"jetpack_featured_media_url":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-content\/uploads\/sites\/620\/2020\/09\/iStock-1218684266.jpg","_links":{"self":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/2245","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/users\/1820"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/comments?post=2245"}],"version-history":[{"count":3,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/2245\/revisions"}],"predecessor-version":[{"id":2266,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/2245\/revisions\/2266"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/media\/2252"}],"wp:attachment":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/media?parent=2245"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/categories?post=2245"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/tags?post=2245"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}