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By Amit Ummat
Special to the Financial Independence Hub
We’re all talking about how the world will change because of COVID-19 and are already seeing things like more cooking and less takeout, lower profits for more stability, and electronic voting. But what about taxes and tax policy? The global economy is undergoing drastic change, but what will be the repercussions of these changes for tax authorities? We can expect three things: more state involvement, reduced globalization, and universal basic income. Let’s have a look at each of them.
1.) More State Involvement
Governments will be more involved in the economies of their nations and this is where new approaches to tax policy come into play. National governments will no longer tolerate tax minimization by large corporations (including airlines) and then acquiesce to requests for taxpayer-funded bailouts.
Denmark and Poland recently made it policy to exclude tax-haven companies from COVID-19 relief schemes. So, if a corporation fails to pay its fair share of tax and thereby fails to finance public goods and services, it cannot expect state-sponsored loans or wage-subsidy programs. The government of Denmark said companies which pay out dividends, buy back their own shares, or register in offshore tax jurisdictions, will not be eligible for aid programs from the state.
Expect more of this. It means income inequality will be tolerated much less by governments and society, prompting action by tax authorities to ensure that all taxpayers pay their fair share. This is already happening.
We hear echoes from every corner of the world that the share of revenues going to labour and producers are grossly out of whack. In 1960 labour expenses were roughly equal to profits, but now there is incredible disparity with the lion’s share of revenues going to capital owners and only a small fraction going to labour, and that fraction hasn’t even kept pace with inflation.
Don’t expect a Marxist-type revolution where the means of production are usurped by the working class, but there will be an expectation for income allocation to be more equalized between capital and labour.
2.) Reduced Globalization and Stronger Domestic Supply Chains
With this pandemic we have seen what happens when nations aren’t able to control supply chains for essential goods (i.e., ventilators and other PPE). The United States is a perfect example. Globally, we will see supply chains repatriated by nations, and technology allowing for this through AI (Artificial Intelligence), portable manufacturing equipment, and more accessible communications. This will make it easier to impose tax on corporations since much of the activity will take place in a single geographic jurisdiction.
While globalization has produced a myriad of benefits, including a huge reduction of poverty in the world, it’s no coincidence that the growth of the globalized economy has spawned incredible growth to the middle class, such as in China and India. But this has also led to the loss of manufacturing jobs in Western countries. One can argue that globalization is why Western nations have become almost entirely service-based.
Today production occurs in various stages in different countries, which is true in the auto industry and the manufacture of iPhones, with a constant attempt to increase productivity and minimize costs. To a large extent, this has already occurred. Global supply chains have improved economic efficiency, but the pandemic is a stark reminder of how fragile the global supply chain really is.
So, what does this all mean in terms of a pandemic and what does the future hold? Companies are now closing all over the world. The desire of each geographic location in an industry to specialize in individual aspects of the supply chain has led to serious economic issues.
Expect a move away from individual specialization. For example, take the case of iPhones again. It would be far less problematic in terms of disruption to the supply chain if five countries, and not 23, were involved in product manufacture. Artificial intelligence and portable-manufacturing equipment allow small domestic manufacturers to compete with large players who have access to cheap human capital. This trend will continue, especially with more accessible education. Indeed, nations around the world will try to repatriate critical supply chains to avoid future disruptions.
3.) Universal Basic Income
An obvious consequence of COVID-19 is that millions of lost jobs will not exist after the pandemic, so expect developed nations to begin instituting universal basic income. Nations will fare better ensuring the delivery of basic needs to their people. But this will change how tax is collected and redistributed.
In Canada government programs like welfare or the credit/refund system can be very complicated for administrators and recipients. A simplified single-cash payment would drastically reduce bureaucracy and might fundamentally replace most existing social-welfare programs. This will also lead to reduced government cost.
But a Universal Basic Income is not a bed of roses. First, the cost of administering a basic income program means taxes will go up, but a capital tax on large corporations of only 2% to 4% would amply finance a basic-income program. Second, basic income will create inflation and many recipients will spend the extra cash, driving up demand. If manufacturers cannot increase supply, they raise prices and higher prices soon make the basics unaffordable to those who earn less. Third, incentives to work may disappear as people trade in their working hours to receive the basic income.
However, some countries that really need basic income due to reduced jobs or growing poverty have a political climate that won’t allow for this. The United States is a prime example since the American public has routinely espoused dislike for government handouts.
But in the context of a pandemic, basic income could be a safety net. The Canada Emergency Response Benefit (CERB) is an example of basic income. However, in future basic income as a policy would be a proactive measure instead of a reactive one.
It is likely that a basic-income program would have reduced the social and economic difficulties now being experienced in Canada due to COVID-19. So many people will find that their jobs do not exist post-pandemic. A more dignified approach would have been to ensure that everyone has basic necessities in place.
Hopefully, a post-COVID world is one where lessons are learned. Lessons include the damaging effects of laissez-faire-style state involvement in the economy during tumultuous times, and the problems of having a supply chain that is too spread out. Lastly, and perhaps most important of all, life improves for everyone when all can avail themselves of basic life necessities, including rent and food. It is time to consider a universal basic income to avoid the economic and social impact of a future pandemic.
Amit Ummat is a tax lawyer who runs Ummat Tax Law in Oakville, Ontario. He worked with the federal Department of Justice before starting his own firm.
