The global pandemic has been a reminder that sacrifices must be made for the common good. Over the last few months, people everywhere were urged to do their duty — some by staying home, others by carrying on. At some point, they will all be asked to reach deeper into their wallets for what will likely be a long recovery.
Tax changes are coming, and the rich — who have done remarkably well even during the pandemic — could be targeted for special consideration. Until then, policymakers everywhere might consider priming the public to accept higher taxes by appealing to unity, fairness and patriotism.
"This is the time to tell all people to pull together in order to survive," says Katharina Gangl, a psychologist with expertise in tax compliance at the Vienna-based Institute for Advanced Studies. "The state should see citizens as their partners." Gangl advises governments to work directly with wealthy people and develop advertising campaigns that equate paying taxes with helping to fight the pandemic. "It has to be done in a nuanced way, and it has to be well planned."
Of course, new policies and tax rises are unlikely to happen anytime soon, at least not in Canada. In the short-term, continued borrowing is seen as the right and sensible thing, particularly as interest rates remain at a record low. And it could continue for quite some time.
"In the current environment, the federal government looks more ready to deficit finance current improvements and let future generations deal with the risks associated with higher debt," said Kevin Page, the first ever Parliamentary Budget Officer for Canada. "The need for more revenues could be a central issue post-COVID-19," he said in an email.
Many ideas are on the table: tinkering with and modifying duties, like capital gains or property taxes, death, luxury and wealth levies. Digital taxes will be more fully considered while increasing the traditional workhorses — consumption and income levies — are widely expected on both sides of the Atlantic. Taxpayers everywhere will need to take a deep breath.
"The best way to raise more revenue in Canada is to restore the 2 % point cut in GST that Harper made — i.e., raise the GST rate from 5% back up to 7%," said Jim Davies, an economics professor at Western University, who focuses on tax policies. "There is a high level of agreement among economists that this would be the most efficient approach," he said in an email.
It is far from clear that controversial changes like wealth and digital taxes will fly in Canada. In the age of a globalizing digital economy, it's difficult for a single country to introduce novel taxes as governments are very aware of the national economic interests being tied to national tax policy. Both would be used to attract foreign capital and businesses.
"A high-level international consensus or coordination is desirable," said Jinyan Li, a tax law professor at York University. About 140 countries are currently working on the issue of taxing digital businesses, but no international initiative is being taken to taxing wealth. "Canada has a small open economy and is thus more sensitive to and supportive of international initiatives."
There also needs to be the political will to force through these changes. Page, who now runs the Institute of Fiscal Studies and Democracy at Ottawa University, doesn't see "strong" enough leadership in Canada to implement these new taxes. "Some will argue that the biggest impediment to tax reform and tax increases is trust. Prior to COVID-19, trust was low," he added in an email.
Still, governments worldwide are scrambling to fill gaping holes in local and national budgets as the pandemic continues to force expensive lockdowns and medical interventions.
Canada's parliament budget watchdog has already given notice that tax increases, in general, are "unavoidable" given the soaring public spending and projected budget deficit: a record $328.5 billion, amounting to 15% of GDP. Canada is not alone. According to the International Monetary Fund, the world is on course for the deepest recession since the 1930s. A global contraction of 3% in 2020 is expected, with increasing unemployment widespread. Citizens will continue to need extra help for a long time.
But not everyone has suffered. Billionaires fared well during the pandemic, according to Swiss bank UBS and PwC, by taking advantage of stock market gyrations, adding another quarter to their riches to a staggering $10.2 trillion. This will likely fuel calls for policies that target the wealthy.
Even before the pandemic hit, income inequality was at levels not seen in a century, helped by several decades of tax breaks. Based on recent estimates, the top one per cent control more than a quarter of Canada's wealth while the bottom 40% own a mere one per cent.
Indeed, the government said during its Throne Speech in September it wants to identify additional ways to tax "extreme wealth inequality." Polls show most Canadians support a wealth tax, and some rich Canadians have even formed a pressure group to achieve this goal.
Less clear is whether wealth taxes will get the job done. Some studies show they could help reduce income inequality, but history tells a different story. Many countries have concluded that they are more bother than they are worth, and have opted to scrap them altogether.
"Classical versions of a wealth tax are administratively a difficult thing to do," said Sven Steinmo, a professor at the University of Colorado and author of several books on tax compliance. "One of the problems is that they are relatively easy to avoid."
Theoretically, inheritance taxes could address "unfairness and ensure greater equality of opportunity because unearned wealth passed down intergenerationally can perpetuate economic power. But we need to figure out what we really want to achieve," says Margaret O'Sullivan, the managing partner of O'Sullivan Estate Lawyers. "In actuality, they generate very little revenue."
A potentially much bigger earner is reducing the way the rich can cut their liabilities. Canada is deprived of as much as $51 billion in uncollected taxes annually thanks to legal and illegal tax schemes, according to some estimates. While Norway's universal tax return transparency may be too radical for most Canadians, activists and think tanks aren't short of other remedies.
Closing loopholes "is my number one suggestion," says Steinmo, who adds that states lose out in two ways when people make use of these — by losing revenue and making honest folk feel like suckers for paying. Making it less socially acceptable to seek out these measures is critical, according to Gangl.
There is a view circulating that non-divisive, positive advertising campaigns that emphasize unity, fairness and cohesiveness in the face of COVID-19 could boost patriotism needed to counter tax resistance. The goal is to equate higher taxes with better outcomes for everyone.
What is more, it has worked before.
"Such campaigns have been very successfully employed during wars, and one could imagine that they may likewise be useful during the current crisis," said Benny Geys, a professor at BI Norwegian Business School in Oslo, in an email.
"Is it possible to change tax culture? Yes, absolutely, look what happened in World War II with 'taxes to beat the Axis,'" says Steinmo.
That was when there was broad agreement that sacrifices were for the national good. For it to return, governments will have to make the case.