At the Milken Institute’s 2020 Global Conference, Kate Barton, EY Global Vice Chair – Tax, shared why tax – and the tax function – is central to facilitating a global economic recovery and building a more inclusive, sustainable future.
Taxes, the central source of most governments’ revenue, play a critical role in everything from funding public services to incentivizing organizational behavior, and attracting capital in a competitive, global economy. It’s no surprise, then, that tax laws and regulations are in a constant state of flux, a phenomenon only accelerated by the COVID-19 pandemic.
Since the pandemic began, more than 138 jurisdictions have amended their tax laws and regulations to alleviate the economic impact, according to EY response trackers. Many of these tax legislative changes have sought to ensure organizations remain solvent, individuals are financially protected and economies remain competitive.
Some of these measures have included deferred tax filing and payment obligations, establishing employment retention schemes, as well as introducing credits and incentives. To date, measures have also included more than US$27 trillion in support and stimulus injected into global economies (including through quantitative easing), a figure that exceeds the combined GDP of the United States, Germany and Japan.
The response is a stark reminder that while free markets and finance are a force for good, governments – and tax policy – remain vital levers in financial crisis management. Together, they play a critical role in protecting people. But while many governments have bolstered economic activity, many countries have still entered a recession, with low economic growth and high unemployment the norm.
In pre-pandemic times, proponents of free markets would have argued for less regulation and government distortion to optimize outcomes for the greater good. But these are not typical times. If governments and organizations are to facilitate an economic recovery, they will need to leverage tax policy for three key reasons.
1. The scale of financial stimulus
The first reason taxes will be front-and-center is simple: governments have accumulated massive amounts of debt to prop up their economies. Both the US and the UK, for example, are experiencing their highest government-to-debt ratios since World War II. While many countries are currently looking to sustain economic activity by keeping tax rates low, eventually, these debts – and associated deficits and interest payments – will see governments seek to plug the gap and pivot from low rate, pro-growth policies to those that are revenue-raising.
2. Shifting supply chains
Second, countries are likely to use their tax policies to encourage companies to make goods closer to the consumer to diversify supply chains. When the pandemic hit and borders shut abruptly, many countries found themselves without key goods (drugs, protective equipment and many other items).
3. Long-term, sustainable growth
The final reason taxes will continue to be play a central role in the global recovery is also the most profound: there is widespread perception that the COVID-19 pandemic has enabled the rich to get richer and the poor to get poorer. This has exacerbated social inequities and has refocused governments on income inequality. As a result, we can expect governments to focus on taxing high net-worth individuals and big businesses more, and people on lower incomes and smaller businesses less. In Australia, for instance, the 2020 federal budget has already provided numerous tax breaks for those earning below certain thresholds.
