Is a solidarity tax on the economic winners of the pandemic a good idea?

In the 1990s, the International Monetary Fund (IMF) developed a reputation as a bastion of “neoliberal” economics. The fund was associated with the so-called Washington Consensus, which held that countries should attempt to deregulate their economies, open themselves up to foreign trade and international capital flows, balance their budgets, and keep taxes low.

But in recent years the IMF has undergone an intellectual revolution. The secretariat of the Washington-based multilateral institution remains strongly in favour of free trade, but it is now much more sceptical of the benefits of uninhibited capital flows. And on balanced national budgets, the fund’s tune is very different.

Even before the pandemic, the IMF was calling on developed countries to spend more on infrastructure. Despite the huge surge in government borrowing last year, it has doubled down on that message, urging wealthy states to spend to support the recovery and not to worry about bringing down their national debts while interest rates remain low.

And in another step on this intellectual journey, the IMF has advocated a “temporary Covid-19 recovery contribution” to be levied on those companies and individuals that have benefitted financially during the pandemic.

But what would be the purpose of such a tax? And is it actually a good idea?

In truth the justification given by the fund is somewhat confusing. On the one hand, the IMF’s Fiscal Monitor report argues that such a levy could “help meet pandemic-related financing needs”.

Yet the report also stresses that governments are under no particular pressure from financial markets to bring down their additional debts accumulated in the crisis, and that they should not be prioritising fiscal consolidation.

The comments from the IMF’s head of fiscal policy, Vitor Gaspar, suggest that the primary benefit of such a levy would be its redistributive impact.

New research by Forbes magazine this week showed that the world’s billionaires added more than $5 trillion to their wealth over the last year. Top of the billionaire tree was Jeff Bezos of Amazon, the digital behemoth whose share price has surged during the pandemic as people have turned to its delivery services more than ever.

The fund highlights the fact that younger workers have disproportionately lost their jobs during the crisis and seen their studies disrupted. And while many wealthier individuals have seen their savings surge, poorer families have been forced to rack up debt.

Many smaller companies have been pushed to the wall, while some large firms, particularly digital multinationals like Amazon, have enjoyed huge increases in sales.

It’s the potential consequences of this widening gap between the pandemic-augmented wealth of those at the top and the economic suffering of millions of ordinary households over the past year that concerns the IMF.

“A vicious cycle of inequality could morph into a social and political seismic crack,” warns Gaspar.

In this sense the real purpose of a one-off wealth tax would not be to fix a hole in the public finances, but rather to reduce inequality and cement social solidarity. The fund notes research showing that major crises tend to increase the appetite of the public for redistribution.

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The traditional objection to such taxes is that they penalise success, perhaps even amounting to expropriation. Some also argue that they risk disincentivising entrepreneurial behaviour in an emergency. Do we want to slap a higher tax bill on a firm that pivoted to sourcing face masks or other badly needed PPE equipment during the crisis in a socially useful way?

But the fund points out that such solidarity levies are not unheard of, citing temporary hikes in income taxes on high earners in Germany after the country’s unification in 1991 and also in Japan after the 2011 Tohoku earthquake.

And many governments have also imposed “windfall” taxes on individual businesses and sectors over the decades. Labour imposed them on energy companies after 1997, and the Conservatives on banks in 1981.

The argument that windfall taxes disincentivise entrepreneurialism is much less compelling if they are retrospective and one-off. And the fact is that many companies profited last year from helpful circumstances, rather than doing anything differently or taking on additional risks. Supermarkets, for instance, saw a surge in revenues because they were allowed to remain open while many other stores were not.

In recommending such a levy, the IMF is, actually, following a trend, and one that has been particularly evident in the UK.

An independent Wealth Tax Commission, made up of respected academics and tax experts, last year recommended a one-off post-pandemic wealth tax for the UK, which it estimated could raise £260bn through an annual 1 per cent tax on millionaire couples over 5 years.

Arun Advani of Warwick University, who helped lead the commission, says the IMF’s ideas are firmly in line with its own proposals.

“It is great to see the IMF both highlighting the need to tax wealth better and proposing a one-off wealth tax where COVID has created a need for additional tax revenue,” he says. “I expect governments around the world will be studying this carefully.”

Meanwhile, the Resolution Foundation think tank has proposed a 10 per cent corporation tax surcharge, which it calls a Pandemic Profit Levy, on windfall profits made during the pandemic, which it says would raise £130m.

Mel Stride, the Conservative MP who heads the influential Treasury Select Committee, also mooted a wealth tax in February. The chancellor, Rishi Sunak, declined to introduce one in his March Budget, but he did impose a significant hike in the headline corporation tax rate to kick in on firms in future years. The Biden administration in the US is doing the same.

A big question, as we emerge from this crisis, is to what extent the expectations of the public have shifted with regard to issues such as the distribution of wealth. Will it be a return to business as usual, with an apparent toleration for high levels of wealth inequality? Or has something fundamental moved? If it is the latter, it’s not impossible that some sort of solidarity wealth tax may yet materialise.