I have always resisted the idea of hypothecated taxation. There are very good reasons for doing so. First, claims of hypothecation are usually a sham if all tax goes into one central pot. Second, as anyone who follows modern monetary theory will know, in most supposedly developed economies tax does not pay for anything: it is money creation that settles the bills, with tax then being used to control inflation. Nothing I am going to say now changes either of those opinions. I stand by both of them. But, there have to be exceptions to every rule, and I’m finding another one.
What is now very clear is that the worldwide Covid crisis is of staggering proportions. We might, at this moment, be doing well in the UK, but what we face is a pandemic, and no country can eventually beat this crisis without all countries doing so, simultaneously. What is very obvious is that in India, Brazil, many European countries and elsewhere this is not happening at present. To therefore pretend that this crisis might be over now is absurd. That is very far from true.
I’m not claiming to be a Covid expert, but it seems very apparent that six things are needed to beat this pandemic.
The first is good PPE.
The second is a proper track and trace system.
The third is compensation for those who must isolate, so that they can afford to do so.
The fourth is an effective, and evolving, vaccination programme.
The fifth is medical care for those who are sick.
Sixth is the need for an economic policy that delivers justice whilst countries adapt to these demands.
Very few countries, including the UK, have all of these. Some countries have very few of them. And unless everyone has them the threat from this pandemic does not go away. That now seems certain.
However, these programmes are costly. So-called developed economies are wondering about their cost. Politicians, frightened by their budgets, are sparing expenditure in some necessary areas. In the UK this is most especially in providing support to those who need to isolate, which contributes to the failure of our track and trace system. However, I suspect that no one has this right as yet.
That is worrying. Millions have died from this pandemic, already. Brazil provides a horrible example of what happens when the disease is first of all ignored and then spreads exponentially without the resources to tackle the resulting healthcare issues arising. It is a lesson in why action is needed.
The required action is global, and not local. That matters. In a very real sense this pandemic warns us about what comes next on the climate crisis, and the biodiversity crisis, both of which are so much bigger. The lesson is that we have no choice but to cooperate. And that means economically, as well as in healthcare.
The issue for economics is a simple one that is suggested by every economist to be at the heart of their discipline. It is about deciding how scarce resources can best be marshalled to meet need. That is what all of economics is about. It has just been rare that this has happened in the way that it is happening now, when the demand for cooperation is so great that we are almost moving on from macroeconomics into something that might be thought to be super-macro.
I’ve already stated the need that this thinking must ensure is met. It so happens that we know that in principle those needs can be met: the resources to ensure that they are exist. There is enough experience now to provide PPE, track and trace, support those isolating and keep vaccinating, as well as to develop new ones to tackle variants, and to keep hospitals going. Economic support is also possible if the will is present. I do not think any of these create insurmountable logistical problems, although I do not dismiss the challenges, which may be considerable.
What I do know is missing is funding.
Of course, MMT might say that this is not a challenge. And in some countries, like the UK, I would say that is true. It is only ignorance of the possibilities within the economies that meet the criteria for MMT to succeed that prevents them from having the funding needed for Covid.
But not all countries have their own readily acceptable currencies, or a well-functioning central bank. Many have tax systems that fail them badly. And many countries are also forced to borrow, and make international settlement of their debts, in currencies other than their own. What is the answer for them, given that the conditions for MMT to work take a long time to produce? How can they secure the resources that they need, given that many of the countries in question are also seeing significant increases in poverty?
The simple answer to this is that they may not be able to find the resources that they require within their own economies. Covid might simply make a demand too much for many economies, most especially when the cost of vaccines, and maybe much of the cost of testing will need to be settled in a foreign currency in which the necessary funds cannot necessarily be generated in the sums required by the countries that need to pay.
So what is there to do? This Is where I think that new, hypothecated, taxes have a role to play. There are two such taxes to consider.
The first is a corporation tax. In effect, Biden has already recommended this. A new minimum corporation tax would raise substantial revenues, almost entirely at cost to the shareholders of multinational corporations. The past abuse of tax havens by these multinational corporations has been translated into excessive growth in the valuation of their shares. It would be entirely appropriate if this was corrected now with the new proceeds of this corporation tax being used to fund international coronavirus relief. After all, the companies that will be paying this new tax will be the global corporations that have those benefited in the past from the abuse of domestic tax systems, including in the developing countries that are now in most need of support. There are issues with the technicalities on this tax, but it can work.
The second obvious source of new tax revenue is from wealth. I continue to have some doubts about a wealth tax, as such. This is simply because of the time that it will take to create when the needs created by the coronavirus crisis are pressing now. I do, therefore, continue to stress the importance of levelling the playing field in both domestic and international tax so that significant additional revenues are raised by appropriately taxing the income derived from wealth.
This would mean the creation of an investment income surcharge in many countries to compensate for the fact that wealth is not subject to Social Security charges.
It would also require the elimination of the preferential rates provided to many sources of investment income right across the world.
Income tax and capital gains taxes would need to be equalised.
Corporate and personal income tax rates will also need to be at the very least drawn closer together.
There need to be effective gift and inheritance taxes.
And, it would require that rents are taxed at appropriate rates, with little or no deduction for interest charges, so that this income stream, which always diverts income upwards through the wealth chain, is a suitable source of income to tackle the problems for the world’s poorer people, wherever they are.
And after that consideration of a wealth tax may be appropriate. I, of course, have no objection to anybody working on the ideas around such a tax now so long as the interim steps that I suggest are also implemented.
How would this work? In my opinion there are three mechanisms to deliver the benefits of such taxes to beat the coronavirus crisis.
In the first instance, Biden has got his corporation tax proposal right, to some degree, by insisting that more tax must be paid in the developing countries where the profits of multinational corporations really arise. But, his plan could definitely be improved, not least by getting the accounting right and by including a labour apportionment in the calculation for the allocation of profits to countries because the current system has a decided bias towards developed countries. Nonetheless, the direction of travel is correct: multinational corporations have to make larger tax payments in the countries that they have traditionally exploited.
Second, and perhaps more significant, is the idea that some of these new revenues have to simply be reallocated to developing countries to ensure that they can meet their targets with regard to coronavirus. When I first played with the idea for a minimum global corporation tax I called it a TFID - a tax for international development, and that is what we need now. The idea of quite explicit redistribution has to be implicit within the global tax system if it is to meet the demands of this era￼. Hypothecation for this purpose is entirely appropriate, but should not set a maximum for the amount to be paid￼. I stress this is one of the points where I depart from MMT: this is not tax as a revenue raiser, or the mechanism for inflation control. This is tax as an instrument for social change, and that is why it is necessary.
Third, something else that is necessary is a pool of revenue available for developing countries to use to make payment for the Covid vaccines and other medical supplies that developing countries might need which will be priced in the currencies of the developed countries that might otherwise be unavailable to them. So, for example, wealth taxes could be used to create a fund to pay for such vaccines, medical supplies and training and support that can only be settled using the dollar, pound, euro or yen, which are always currencies in desperately short supply in developing countries, and which are particularly so at times of economic crisis. The hypothecation is in this case potentially necessary precisely because most developing countries do not meet the MMT criteria of having a currency that is internationally acceptable, whatever the reason might be.
Whether this pool of funds is used to simply provide foreign exchange, by way of currency swap, or might be used as a source for direct intervention and so provide a further redistribution in favour of developed countries is a point worthy of discussion￼. There may be benefits to both approaches.
But my point at this juncture is a simple one, and is that if foreign currency is likely to prove to be an obstacle to the successful rollout of programs to tackle coronavirus in developing countries then that has to be overcome, and taxes on wealth on those with the greatest ability to pay, wherever they might be located in the world, can play a critical part￼ in achieving this.
I have put these ideas forward for discussion, knowing their strengths, weaknesses, and the theoretical opposition to them.
I also propose them knowing that a similar program of redistribution from the wealthiest to the poorest, and between nations, will be necessary to tackle the climate and biodiversity crises and that as a consequence whatever we can learn now will be valuable for the long term.
The question is a simple one. It is, are we willing to make the tax changes that are necessary to ensure that resources are released in the form in which they are required to tackle the crisis facing the world, which threatens us all? And, if not, why not?