By Chloe Chan, Analyst at King’s Global Markets
The International Monetary Fund has recently proposed the idea for countries to implement a “solidarity tax” on “winners” of the pandemic. This would include a vast number of high earners and profitable companies that have prospered because of the pandemic. Their proposition stems from the widening of the wealth gap within societies all around the world, and this is seen to be their fix for bolstering social cohesion. To truly understand how the implementation of a solidarity tax would affect the state of the world economy, it is crucial to understand all benefits and drawbacks of this proposition.
What is a solidarity tax?
A solidarity tax is a government-imposed tax that is levied as an attempt to raise funding which allows financing of unifying projects. It works alongside other forms of taxes such as income taxes, corporate taxes. Historically, it has been invoked during trying times such as war or to raise funding for large scale infrastructure projects.
Intuitively, the term “solidarity tax” is coined as the tax is a gesture to show solidarity or support to the targets or projects that would benefit from such funding. A solidarity tax works similar to that of personal income or even corporate tax, it is calculated based on a percentage of the tax bill of the individual or entity. It could come in the form of a surcharge, or a one-time payment, mostly on a temporary basis. In the context of the IMF’s proposal, a COVID-19 solidarity tax acts as a mechanism of wealth reallocation. The tax would be imposed on businesses that have thrived due to the pandemic. This includes a large number of e-commerce platforms and vendors and businesses that have innovated and adapted well with the changing business landscape shaped by the global pandemic.
Solidarity taxes have been implemented over the years and with varying degrees of success. An example would be France, which has had a long-standing history of implementing a solidarity tax for nearly 40 years. France had a solidarity tax levied on wealth, that was only abolished in 2017, only to be replaced by a solidarity tax on property in 2018. This solidarity tax was paid by high net worth households (exceeding €1.3 million). The tax was levied on all assets, not only locally, but also globally.
Why is there a need to consider the IMF’s proposition?
The pandemic has led to various economies around the world to enter a region of negative growth and deflation. This has been due to supply chain delays due to closures of manufacturing facilities and even to lockdowns which has closed down nearly all non-essential shops. The decline in economic productivity has led to household income to drop, savings to increase and spending to fall. All of these components contributed to economies slowing down their growth, with most developed economies entering regions of negative growth.
Research has also suggested that the pandemic has led to record-breaking levels of income inequality. Therefore, from the IMF’s point of view, there is a dire need for policies to be enforced in order to tackle these socio-economic issues that have arisen as a consequence of the pandemic. As mentioned, the IMF proposed this as a means of reallocating wealth to increase per capita income and increase overall level of economic equality within the society.
Individuals or businesses that have “benefitted” from the COVID-19 pandemic would be subjected to this proposed “solidarity tax”. This would in turn be translated to government spending that specifically targets groups that have suffered during the course of the pandemic. This might include individuals that have been laid off due to financial hardships faced by their employers or businesses that have been forced into closure due to the lockdowns.
The IMF’s proposition seems to offer a sound solution to economies trying to recover and to encourage productivity. However, it is also necessary to observe the situation from another perspective.
Why is it considered to be a bad idea?
In my opinion, I see the COVID-19 solidarity tax as a bad idea. This is not to say that solidarity taxes do not work, I simply do not believe they are a good tool to utilise in the context of this pandemic and as a catalyst to drive economic recovery.
The solidarity tax has seen a period where it has been somewhat effective. Citing Germany as an example, their solidarity tax was first imposed in 1991, as an effort to rebuild Eastern Germany at the time. The tax proved itself to be helpful in smoothing the operations of the newly integrated government administration. However, it was abolished after the completion of this “short-term” project.
However, I believe the COVID-19 pandemic situation to be drastically different to that of Germany. In my opinion, the “targets” are different in this context. The COVID-19 pandemic has clearly distinguished businesses that have been able to flexibly adjust their business model in order to remain competitive and productive throughout these trying times. I see this as a trend that should be encouraged and that more should follow the example set by these businesses. We have seen a boom in the technology industry where IPOs have hit a record high in volume and value in the last financial year. Intuitively, we can come to realise that the technological industry has bolstered a lot of inconveniences and troubles caused by the pandemic.
To a more extreme extent, I believe the IMF’s proposition would hinder the developments and breakthroughs made by the tax’s “targets”. The COVID-19 solidarity tax would hinder technological progress greatly by discouraging innovation and improvement.
Trying to understand this point through a well-known household name – Deliveroo. Deliveroo has recently gone public on the London Stock exchange in March. This was made possible due to the pandemic and a record exploding volume of new users caused by the pandemic and closures of restaurants. Deliveroo would likely become a target of the solidarity tax as they would be considered a company that has “won” due to the pandemic. However, this would reduce the amount of earnings they have that could be contributed towards improving their current services.
Therefore, this is clear evidence to suggest why I believe the solidarity tax to be highly counter-intuitive. Despite its effectiveness in the past, it would not be the best solution to aid economic recovery.
Final Verdict
It would be foolish to suggest that solidarity taxes as a concept are not feasible or effective. They have in the past served as a mechanism of wealth reallocation and have been helpful in reducing social inequalities. However, in the case of the COVID-19 pandemic recovery, I believe solidarity taxes can be somewhat damaging if imposed upon businesses and individuals that are considered to be “winners” of the pandemic.
There is a dire need to consider alternative solutions that would be able to serve the same purpose of bolstering social cohesions and reducing inequalities. However, I can with confidence assert that the solidarity tax would not be the appropriate solution to our problems.
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Extra reading
https://www.ft.com/content/5dad2390-8a32-4908-8c96-6d23cd037c38
https://www.thejournal.ie/imf-wealth-tax-5402719-Apr2021/
https://www.ft.com/content/7806f582-3545-4067-b4e8-04c28ac719eb
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