Reasonable Tax Policies After Corona?

The European Union spends €2.7 billion to increase vaccine production, but as much as €750 billion is spent on the recovery fund. To help prepare for the economic and social damage caused by the coronavirus pandemic, the European Commission, the European Parliament, and the European Union leaders have agreed on a recovery plan that will lead the way out of the crisis and lay the foundation for a modern and more sustainable Europe. It is called the “Recovery and Resilience Facility.”

One may wonder about the prioritization between the cure against the pandemic and economic recovery and how little is spent on getting more vaccines. And the cost for the recovery fund is enormous and no one knows how and for what it will be used. Countries will most definitely interpret “modern“ and “sustainable“ differently. They will probably fight for this for years. The only clear thing is that taxpayers will have to pay and politicians will get more power.

There is much to be said about the management of the coronavirus in the European Union and its member states. The major cost of the pandemic is lockdowns. However, the pandemic is only a notch in the growth curve, which was already too low in the European Union. But the pandemic is directly devastating to many companies that have collapsed. Perhaps, a life’s work or even the creation of generations that have been lost in family businesses. Unemployment will increase and we will definitely be worse off immediately after the pandemic.

The world will recover if, and only if we let the market work. The vaccine might be the medicine for the corona disease, but growth is the cure for the economy. Even before the pandemic, many countries pursued the post-crisis policy. Low interest rates and the European Central Bank’s asset purchase program have kept companies alive. Now corona programs created in Brussels are added on top of this. Stimulus and investment policy programs take financial resources from good investments, probably also competence.

Of course, there are those who always see the state as a savior. They use the crisis as an excuse for more politics. But it is really worrying if the center-right parties now join this agenda with government interventions, costly programs, etc. State subsidies are going to distort investments, businesses with solid business plans and products may be competed out of the markets by firms getting subsidies.

Let’s learn from history. Remember Ronald Reagan in 1986: “The nine most tarrying words in the English language are “I’m from the government and I’m here to help.” Also, remember the New Deal and “The Forgotten Man” by Amity Shlaes about Franklin D. Roosevelt. Shlaes tells the story about how Franklin D. Roosevelt doubled the state budget, but in 1937, eight years after the great stock market crash on Wall Street, there were still people starving in New York.

I have great sympathy for companies being compensated for losses due to the lockdowns because companies are not allowed to do business during the lockdowns and also because the price tag for lockdowns must be visible. But the rule of politics is to limit the threats and effects of the pandemic in crisis. When the crisis is over, the market must be allowed to work as free as possible and without being taxed excessively. There is a depressed demand for consumption, need for traveling, visit a restaurant, and much more that we have been missing. States should not compete with this consumption.

Already in the Financial Times and The Economist, the discussion about how to pay for state interventions during the crisis has started. They talk about raising taxes, especially on capital and businesses. These are dangerous ideas.

In Sweden, we got vaccinated against these policies during the 1970s and 1980s. Sweden had punitive taxes against private ownership and had to pay dearly for this: high unemployment, weak growth, and falling real wages. Some of you have probably heard of the famous writer Astrid Lindgren paying 102% in taxes in 1976. Finally, Sweden was forced to reform. From the 1990s and on, Sweden has abolished taxes on wealth, inheritance and gifts, and has a reduced taxes on labor and entrepreneurship.  Since we got rid of punitive labor and ownership, we have a lower tax burden, while tax revenues have increased. The tax ratio has declined from 49% to 43% of GDP since 2000, while tax income, adjusted for inflation has increased by 602 billion Swedish kronor. Some socialists in Sweden still dream about introducing these taxes, but most people got vaccinated against ideas of new taxes on wealth. (books by Anders Ydstedt on how the Swedish business climate has improved since Sweden abolished inheritance and wealth tax, link 1, link 2, link 3).

Let’s hope the vaccination is still potent and working. There are increasing demands to address inequalities by increasing taxes on capital. The biggest inequality is of course between those having a job and those not having a job. Therefore, investments and more businesses are key to reducing inequality, and for that, you need lower and not higher taxes.

Most important for economic recovery is growth and high taxes will harm growth. Increased borrowing, inflation, printing money, or issuing bonds is equivalent to taxes. The Ricardian equivalence tells us that consumers are forward-looking and internalize the government’s budget constraints when they are making their consumption decisions. There is no such thing as free lunch. My recipe is simple – cut spending, sell government assets, and get rid of red tape against businesses. Make sure private investors get the possibilities took them up with the best solutions, not only for jobs but also for digitalization and greener development.

Let’s speculate about the near future. We still live with policies from the financial crisis: artificially low interest rates and asset purchase programs. These policies will keep companies alive that are really dead. Some big companies will stand in the way for new healthy businesses. Looking back to the aftermath of the financial crisis, we also have the start of the war on corporation tax. Politicians were telling voters that they could raise more taxes from multinational enterprises. In reality, they are fighting for the same tax revenues. This dangerous development will probably continue even stronger after the corona crisis.

Remember that corporation taxes are only a small part of total tax revenues but could convince businesses to move. When businesses move, tax bases such as labor and consumption also moves. Please, put an end to stupid retaliation against countries providing better conditions for businesses.

I am optimistic. I look forward to consuming much more when the pandemic is over. The same is true for billions of people. Get ready for a bright future. The only obstacle to economic recovery is bad politics. Let’s fight together for free markets and open societies.