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We do not need more taxes to respond to the COVID-19 crisis

Reducing corporate taxes allows for improvements in production techniques, technology, and capital investment, which increases productivity and workers’ incomes.

The COVID-19 crisis continues, and the anti-crisis funds swell. In order to provide a direct stimulus, some European countries are taking the sensible decision to reduce tax burdens, while others want to increase them. It is obvious that simplified and reduced taxation would give the necessary boost to consumers and businesses. How can we convince decision-makers to change course?

It is not unbelievable that the COVID-19 health crisis has allowed many political sides to impose policy proposals that require a crisis to convince public opinion. Unimaginable a year ago, the European Council agreed to a European loan and to raise European taxes. Here we are with a much-changed political debate and a discussion of solidarity that reminds us of the 2008 crisis.

On the other hand, Germany has decided on a temporary reduction of VAT until 1 January, from 19% to 15%, respectively from 7% to 5% for the reduced rate. Thus, as of this month, Irish consumers benefit from a reduction in VAT from 23% to 21%. Given that value-added tax is the most unfair tax on consumers, why not implement a similar measure in other countries?

It is also important to understand two crucial economic lessons. First, we know that a reduction in taxes does not necessarily coincide with a reduction in revenues from Laffer’s work. Second, it is important to know that tax cuts without spending cuts will have little effect. 

It should be remembered that the state as such is not a wealth-generating entity. To finance its activities, it has to draw resources from the private sector. By doing so, it weakens the process of wealth creation and undermines the prospects for real economic growth.

As the state is not a wealth-generating entity, any reduction in taxes while public expenditure continues to rise will not support real economic growth. However, fiscal stimulus could “work” if the flow of real savings is large enough to support, i.e. finance, government activities while allowing a growth rate in private sector activities. If lower taxes are accompanied by lower public spending, citizens will have more means to reactivate wealth creation. Thus we will have a real economic recovery. 

This logic applies to corporate tax cuts, which especially in times of crisis, are not a popular measure. However, those who attack such a cut are wrong. They rely on a zero-sum view of the world in which one person’s gains are seen as another’s losses. They assume that corporate owners enjoy almost all the benefits of corporate tax cuts. They rely on highly distorted data to support their arguments and a poor understanding of how the economy works.

The zero-sum view ignores the fact that voluntary market agreements benefit all participants. Therefore, increasing mutually beneficial trade, as well as reducing taxation, benefits both buyers and sellers. On the other hand, punishing sellers with higher taxes also gives them an incentive to do less with their resources for the service they provide to others.

Reducing corporate taxes allows for improvements in production techniques, technology, and capital investment, which increases productivity and workers’ incomes. In addition, it increases the incentives for risk-taking and entrepreneurship for consumers. This reduces the significant distortions caused by taxation, and these changes benefit workers and consumers.

Centralized collection schemes will show very little results, because the state, in its centralized structure, is unable to know what people really want. If we want to combat the effects of COVID-19 closures, we need to free up the entrepreneurial capacities of citizens, and reduce the regulatory barriers that businesses face.

Originally published here.

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