Who should pay for the COVID-19 crisis? Learning from war-time experiences

To express the gravity of the unfolding pandemic, world leaders have often used analogies to war. Possibly perceived as hyperbole, the comparison between the pandemic and war can nonetheless be enlightening. A severe, society-wide crisis necessitates rapid mobilisation of resources, which have to be collected from someone, somehow. But how, and from whom?

In the immediate perspective, the ‘how’ has three main alternatives, as elaborated by the American economist Edwin Seligman during World War I: “by taxes, by loans, or by paper money”.

Governments have initially been able to cover their COVID emergency spending through two of Seligman’s mechanisms. They have borrowed massively, often assisted by their central banks’ purchase of bonds – essentially ‘printing money’. Crucially, and in contrast to most war situations, inflation has remained low, as government-imposed restrictions depressed overall demand.

The peculiarities of the pandemic have thus given many governments a respite: average tax rates did not increase in 2021. But once the printing presses stop, taxes will have to be raised.

The conundrum for war-time governments across the world, and throughout history, is two-fold. Just as the need for revenue explodes, the public’s perception of what is fair fiscal policy is changing dramatically. War brings unequal burdens and benefits: while some die in trenches, others get rich. In short, it is terribly unfair. Moreover, in the face of a common threat, the principles of equal sacrifice and solidarity are raised to highest public virtues.

According to research by Kenneth Scheve and David Stasavage, the total wars of the early twentieth century led to the expansion of progressive taxation in the West. As I show in my doctoral research, the process has neither been a Western peculiarity, nor restricted to mass-mobilising inter-state wars. The pattern has appeared across the world – whether in India or Iraq, in Portugal or Peru – during and after major armed conflicts of all types. Glaring war-time inequality coupled with patriotic notions of equal sacrifices have led populations to refuse anything but distinctly progressive taxes. And so governments have been forced to tax the rich.

Is the COVID crisis different?

We now know that the poor, and by extension, minority groups, have been significantly worse hit than upper- and middle-classes in terms of COVID infections and mortality rates. Manual labourers have had to face high infection risk at work – or else be thrown into unemployment. Others have been able to work relatively unaffected from their homes. Educational disparities have likewise been amplified.

Meanwhile, some have become rich. Apart from cases of blatant profiteering, the expansionary macro-economic policies of Western governments have enflamed equity prices, further benefiting the already rich. The wealth of the ultra-rich, such as Bezos, Musk and Zuckerberg, has virtually exploded.

Just like wars, the unequal effects of the pandemic appear to have sharpened demands for fiscal redistribution. In a UK Study conducted after the first lock-down of 2020, 54% of respondents preferred a new wealth tax to meet the current fiscal needs, most commonly motivated by an excessive and growing wealth gap. Another, more recent, study from the US shows that individuals hard-hit by the COVID crisis are more supportive of introducing progressive levies.

The obvious resort for legitimacy-seeking governments would be to tax the rich to pay for the crisis. For, as history has shown – from medieval Florence to the gilets jaunes and the Lebanese thauwra of 2019 – the surest way to trigger a popular revolt is to impose taxes in contradiction with popular notions of fairness. In the context of society-wide crisis, when attitudes to fiscal fairness are certain to be radicalised, governments which ignore popular demands for tax justice will certainly do so at their peril.

The neoliberal paradigm and prospects for progressive taxes

But governments must consider more than the will of their people. My study of fiscal responses to war in the contemporary period shows another striking result: whereas progressive taxes were the standard policy outcome of armed conflicts across the world, this changed after the Cold War. In simple terms, both the growing power of domestic economic elites and the new, hegemonic status of a neoliberal policy paradigm have militated against progressive taxes.

Consequently, post-war tax revenues have typically remained low, and war-time economic inequities have persisted. For in lieu of fair, progressive taxation there will be little taxation at all: lower and middle classes having experienced the inequities of war will refuse to carry the brunt of the additional fiscal burden. Thus, post-war states – such as Lebanon, Bosnia, Afghanistan, and Iraq – have only, and barely, kept afloat by perpetual debt expansion and foreign aid.

So, are today’s governments likewise stuck between powerful economic elites, backed by tax competition and IMF demands, and popular anger over COVID crisis-induced inequalities? Perhaps not.

In an astonishing volte-face, the IMF – for decades the global spearhead of broad-based, ‘non-distortionary’ tax reforms – has called for more progressive taxes, including on wealth, to cover the COVID-related deficits. Perhaps more important, the US has suddenly pushed for a global minimum corporate tax, breaking a years-old deadlock in the OECD, and signifying a first leap towards restricting international corporate tax competition. Objectively, these developments provide national governments more room for manoeuvre; politically, these same governments will henceforth have difficulties using the IMF or the spectre of ‘globalisation’ to justify their reluctance to tax the rich.

In short, international constraints to progressive taxation appear considerably weakened. Whether governments can overcome the power of ever-wealthier elites is still an open question. But if past experiences of war can provide any lessons for the current fiscal predicament – and I argue they can – taxing the rich may well be the safe way to go. Two recent examples from Latin America illustrate both that more fiscal fairness is possible and that governments risk a serious backlash if they ignore popular demands for it.

In December 2020, to cover the costs of COVID emergency measures, Argentina’s government introduced a ‘millionaire’s tax’ – a graduated wealth levy reaching 5.25% and conspicuously targeting some 10,000 of its richest citizens. Notwithstanding vocal protests from members of the economic elite, revenue collection turned out higher than expected, reaching a substantial 0.5% of GDP.

A few months later, and with the same aim, Colombia’s government proposed a tax package which, aside from a few progressive measures, featured increased VAT on basic goods and the expansion of income tax to lower-income groups. Widely perceived to burden those hit hardest by the COVID crisis, the proposal sparked nationwide protests, with dozens of dead and huge economic losses. The government hastily withdrew the proposal and eventually revised it to increase corporate taxes, thus focusing squarely on the rich.

It now seems that more governments are heeding the demands of NGOs and are gravitating towards the Argentinian example. Luckily. For over and above questions of distributive justice and economic efficiency, if the fiscal experiences of war can teach us anything, it is that governments who wish to stay in power would be well advised to make the rich pay for the COVID crisis.

Jakob Frizell is a PhD Researcher in the EUI’s Department of Political and Social Sciences. His forthcoming doctoral thesis is titled “Making the Rich Pay for the War: The politics of fiscal fairness in contemporary conflict-affected states”. The supporting war-time data on taxation can be found here. He has a chapter in the volume Global Taxation: How Modern Taxes Conquered the World (Oxford University Press, 2021).