Wednesday, December 2, 2020
Reuven Avi-Yonah (Michigan) presents COVID-19 and U.S. Tax Policy: What Needs to Change? virtually today at Utah as part of its Faculty Workshop Series hosted by Young Ran (Christine) Kim:
The COVID-19 Pandemic already feels like a historical turning point akin to Word Wars I and II and the Great Depression. It may signal the end of the second period of globalization (1980-2020) and a change in the relative positions of the US and China. It could also lead in the US to significant changes in tax policy designed to bolster the social safety net which was revealed as very porous during the pandemic. In what follows I will first discuss some short-term effects of the pandemic and then some potential longer-term effects on US tax policy.
The U.S. government, like other governments around the world, is currently spending trillions of dollars to contain the immediate effects of the pandemic. In the longer term, much more spending will be needed to strengthen the U.S. social safety net, which was revealed as uniquely porous among OECD countries and has led to many unnecessary deaths. Politicians are discussing universal health insurance as well as free public college education and a massive investment in infrastructure.
Al of this will require a lot of money. Some more revenue can be extracted from current taxes like the individual and corporate income taxes, as well as the payroll tax (there is no good reason to cap the payroll tax at the first $100,000 of income). But there are limits. We can have a very high corporate tax rate because that falls on rents, but the corporate tax is only 10% of total revenues, and the individual tax and the payroll tax (the remaining 90%) cannot be raised too high because that will discourage work. Thus, in my opinion there is no escape: The US will have to join the rest of the world and enact a federal VAT.