This article first appeared in Forum, The Edge Malaysia Weekly on January 24, 2022 - January 30, 2022

Governments must innovatively develop progressive means to finance the large-scale social spending needed to improve lives and livelihoods, especially following the Covid-19 pandemic. More egalitarian tax reforms should enable governments to equitably mobilise desperately needed revenue to advance sustainable development for all.

To respond to the pandemic and its economic fallout, massive resource mobilisation has been necessary to protect people’s health and livelihoods, stem economic decline and stagnation, and ensure sustainable progress.

Fiscal policy enables governments to harness and deploy resources. But the modes of state financing and spending that are adopted vary in their impact on economic inequalities. Monetary policy measures can be supportive, but they cannot replace fiscal efforts.

However, due to the economic slowdown, much more state spending is required, largely financed by sovereign debt, that is, government borrowing. This has undoubtedly been necessary to deal with the pandemic, but fiscal policy should be consistently countercyclical: expansionary to counter downturns, and conservative in good times.

Rich countries have generally been fiscally bolder in running deficits to increase spending since the global financial crisis, but have stepped it up especially in response to the pandemic. Massive economic relief and recovery packages have tried to protect incomes and failing businesses, albeit unevenly.

Regressive colonial taxes were levied on subject populations, but tax incidence became more progressive after independence in most, though not all, post-colonial societies. In the last four decades, most governments have reformed tax policies for the worse, reducing tax revenue shares and shifting the tax burden from the better off to the public at large.

Policy advice from international financial institutions and political pressure from powerful elites and foreign investors have reduced taxation’s progressive aspects. With former US president Donald Trump, laughable arguments such as Arthur Laffer’s curve — without any sound theoretical or empirical bases — are still being invoked to justify regressive tax reforms.

Rich corporations and individuals have paid less and less in direct taxes, as the public paid more and more in indirect taxation, typically on consumption. Most countries still tax income, but tax rates on corporate income, high income individuals, property and inheritance have declined in most countries in recent decades.

The assets of the wealthy are mainly held as stocks, shares and real property. Their incomes are mainly from such assets, rather than earned as wages. Taxing excess profit and wealth can raise considerable revenue to finance development policies and measures, besides narrowing gaps between the beneficiaries and others.

Instead, wealth is typically taxed at low rates, while huge loopholes allow such assets to be hidden, typically abroad. Many trillions are hoarded in often secret accounts in tax havens, both off- and onshore. All this has accelerated wealth concentration and economic inequality.

Governments mainly get fiscal resources from tax revenue or by borrowing. Taxation is undoubtedly the most sustainable, effective and accountable means for states to raise funds. Progressive taxation and government expenditure can both reduce inequalities, albeit in different ways.

A few individuals and businesses are reaping huge rewards from the pandemic while most have been hurting. Many billionaires have reportedly become much more affluent, with the 10 richest more than doubling their wealth from US$700 billion (RM2.9 trillion) to US$1,500 billion since March 2020!

Windfall taxes at high rates are easily justified. After all, most who have gained much owe their newfound wealth to circumstances largely not of their own making. Windfall incomes or profits during the pandemic can be ascertained by comparing recent with previous profits. Such gains should be heavily taxed for the same reason.

Wealth taxation has diminished significantly in recent decades due to successful lobbying by the rich. The introduction or reintroduction and extension of progressive wealth taxation will raise considerable revenue if loopholes can be closed, not only domestically, but also internationally.

Perhaps even more than income taxation, wealth taxes are a progressive means to raise revenue. They also have greater potential to address other inherited privileges and inequalities, including those associated with culture, lineage, ethnicity and gender.

Government spending — including subsidies and relief measures — should not benefit businesses paying taxes abroad or not paying them at all. Many companies resort to tax havens and other loopholes to pay less tax where they operate and profit from.

Tax systems should get much more from those most liable and able to pay. Concretely, this should include:

•     Introducing or increasing taxes on assets like real property, wealth, inheritance and investment income (“capital gains”).

•     Raising the rates and progressivity of personal and business income taxes.

•     Shifting relative reliance from indirect taxes — for example, on value-added or sales or consumption — which tend to be regressive to more progressive direct taxation.

•     Cracking down hard on tax avoidance and evasion — especially by the wealthy, however politically influential.

•     Enhancing international cooperation on taxation to enhance and distribute tax revenue progressively.

Such systemic reforms are essential for progressive fiscal redistribution, for example, by financing sustainable development in the medium and long term. Of course, an immediate priority in the near term is financing a forward-looking recovery from the pandemic and its aftermath.

Governments are expected to raise enough revenue to finance the services, goods, facilities and infrastructure they are supposed to provide, that is to fulfil public expectations of citizens’ entitlements. The popular presumption is that tax incidence is not only progressive, but has also become increasingly so, although the converse is more likely to be true.

Taxation is widely expected to reduce, if not remedy, inequalities. If well-designed for effective implementation and enforcement, the international record suggests this is achievable. In line with the public’s progressive redistribution expectations, the government is expected to be Robin Hood-like — to take from the rich to give to the poor.

Of course, whether taxation is progressive depends on how it is collected and spent. Hence, tax and spending policies should be considered together. But it is now clear that some pandemic relief packages have mainly benefited influential businesses, with crumbs going to the most needy.

International cooperation is needed for appropriate tax reforms in this age of financial globalisation and to prevent increasing capital outflows from developing countries. For the time being, minimising tax evasion depends on equitable and effective international cooperation on terms fair to all, rather than conditions imposed by the rich countries, as has been the case.

Jomo Kwame Sundaram, a former economics professor, was UN assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.