A COVID-19 Recovery Contribution

IMF Blog, April 16, 2021

Source details

Survey evidence from a recent survey of 2,500 US residents suggests the pandemic and its adverse economic consequences may lead to more favorable opinions of progressive taxation.
Definition preserved from source: "A tax is progressive if the tax liability, as a share of a person’s income, rises with income."
Key survey result: respondents who have experienced serious illness or job loss as a result of COVID-19—or personally know someone who has—favor progressive taxation to a greater extent than others in the sample, by a wide margin (19 percentage points).
Robustness: results hold in regressions controlling for demographic factors, socioeconomic variables, and preferences for various categories of spending (education, health, environment, police, military, and border protection).
Caveats highlighted in the source:
- Results based on surveys must be interpreted with caution.
- Uncertainty about how strongly held such views will be—or how long they will last.
- Other factors may simultaneously be causing a shift in attitudes (for example, past epidemics have been followed by weaker trust in government).

The survey solicited views for and against:
- Increasing taxation as a way of financing the economic recovery as well as additional expenditures made necessary by the pandemic;
- Introducing a temporary tax explicitly linked to this goal; and
- Permanently increasing the degree of progressivity of taxation (with variations such as increasing taxation on people with incomes above average, only the rich, multinational corporations, etc.)

COVID-19 recovery contributions (distinct from a "wealth tax" targeting households’ net assets) levied on the better-off could take forms such as:
- Surcharges on personal income taxes.
- Taxes on "excess profits" of businesses prospering during or after the crisis.
Rationale: those who can afford to pay more—individuals with high incomes or businesses with extraordinary profits—should make a greater contribution from their earnings to help meet extraordinary financing needs and promote social cohesion.
Historical precedents for temporary surcharges on personal income taxes:
- Germany implemented one in 1991 in the wake of reunification.
- Australia implemented one in 2011 following damaging floods in Queensland.
- Japan implemented one in 2013 after the Tohoku earthquake.
- Such a surtax is typically a simple surcharge on the personal income tax, strengthening the progressivity of the underlying tax and being easy to put in place.
- In countries where the existing tax is not very progressive, the source stresses the importance of designing the surtax in a progressive manner.
Historical precedents for excess profit taxes:
- Used in the United States, the United Kingdom, and other countries during and after the two world wars, raising considerable amounts of money.
- To avoid negative impacts on investment and growth, these taxes were levied only on estimated economic rents—the part of profits that exceed a normal return required to make an activity worthwhile.

The source advocates for an agreement to reform international corporate taxation to:
- Better reach economic rents of highly profitable multinationals.
- Limit mutually damaging tax competition.
- Help increase revenues in a progressive manner in a global economy increasingly shaped by digitalization and automation.

Policymakers could consider introducing COVID-19 recovery contributions to raise resources needed for an inclusive recovery.
Design principles emphasized:
- Target contributions on those who can best afford to pay (high‑income individuals and firms with extraordinary profits).
- Ensure surtaxes are designed to strengthen progressivity, especially where underlying taxes are not very progressive.
- Levy excess profit taxes only on estimated economic rents to avoid harming investment and growth.
- Pursue international cooperation on corporate tax reform to capture rents of multinationals and reduce harmful tax competition.
Social and political considerations:
- The pandemic is a test of social solidarity, cohesion, and government effectiveness.
- Individuals harmed by the pandemic are likely to demand more redistributive policies; unmet demands could lead to disillusionment and loss of trust in government.
- Perceptions that governments favored rich individuals and corporations could risk political backlash or social unrest.
- Policymakers should ensure those most hurt do not feel left behind while fostering the economic recovery and safeguarding public finances.

Article authors: Vitor Gaspar, Michael Keen, Alexander Klemm, Paolo Mauro — April 16, 2021.

En Special Series on Covid 19 Tax Law Design Considerations When Implementing Taxing
- En Special Series on Covid 19 Tax Law Design Considerations When Implementing Taxing (Markdown version)
- En Special Series on Covid 19 Tax Law Design Considerations When Implementing Taxing (PDF)
en-special-series-on-covid19-recovery-contributions
- en-special-series-on-covid19-recovery-contributions (Markdown version)
- en-special-series-on-covid19-recovery-contributions (PDF)