Necessity of the Restructuring of the Tax Systems after the end of the Pandemic

Many economies around the world have struggled to maintain a certain level of tax revenue without reducing any current levels of social well-being. Wages in most of the population, especially for low-skilled workers, were low. But the same thing happened with the drastic reduction of the middle class since the onset of the global financial crisis in 2008.

The pandemic and the measures to deal with it (economic shutdowns, lockdowns) have created insurmountable problems and great difficulties of survival in certain sectors of the economy in which many workers work such as retail, the logistics, tourism, etc.

After the end of the pandemic, the reduced levels of entrepreneurship, the reduced productive capacity, which imply lower levels of wages, are expected to appear. Lower wage levels erode the tax base in the long run.

At the same time, the gigantic liquidity injections made by the governments of developed countries to reduce the economic catastrophe have widened budget deficits, necessitating the imposition of fiscal austerity measures in the future, without fiscal liquidity injections being able to reduce millions work.

Rising public debt and budget deficits in government budgets will force governments to find new ways to repay these debts, without limiting investment incentives that will lead to the growth of their economies.

In this context, it is certain that the revenue collection mechanism as well as the tax framework imposed on the economy will undergo a fundamental restructuring since both pillars of the revenue collection mechanism were created some decades ago and do not correspond to today and future data.

For example, many issues can still be resolved nationally today, but issues of digital business taxation are issues of international understanding and cooperation.

The strategic restructuring of a tax system should aim at drastically reducing social inequalities through better redistribution of tax revenues and at the same time increasing the incentive for companies to invest their capital in projects in the real economy. And all this with the lowest operating costs for the state in terms of tax revenue collection.

Reducing social inequalities for governments should mean:

1. Dramatic reduction of indirect taxes and especially excise taxes on basic goods living standards that will have to be almost zero to stop excise taxes from “peeling” literally the low incomes of society, and since they spend most of their income on consumption. In this case lower incomes should be alleviated in the long run by increasing their consumption and improving their living standards.

2. Increase in direct taxes, especially on large and very large incomes with measures equivalent tax return in relation to the tax revenue that will be lost from the reduction of excise duties.

3. Increase in taxes on large real estate.

4. In addition, an increase in taxes on capital earnings should be imposed equivalent to the highest income tax rate, combined with the lowest tax rates on corporate profits that are invested actually in the real economy. In other words, a combination of a tax rate of 4% on the profits of companies investing in the real economy for seven consecutive years and an increase in the tax rate imposed on capital gains (e.g., sales of shares, bonds, derivatives, etc.) at 45% for the same period, it will force companies not to distribute dividends and invest their profits in research and development, production improvement, training and education of their employees creating new jobs. Seven consecutive years of corporate and business investments will rapidly create all those jobs lost due to a pandemic and with better pay, creating the necessary tools in society to reduce social inequalities.

Public sector spending cuts are now imperative, and this can be achieved without reducing the quality and volume of public sector services only by continuously upgrading the technology so that technology can adequately replace and where human intervention is required. But spending cuts have a bottom line and cannot be made further. In this case it is the tax reform-restructuring that should also be at the heart of the developments.

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