An exceptional wealth tax to alleviate

Erasmus School of Economics

The corona crisis has a major impact on government finances. Economists from Leuven and Gent argue that there is no reason to panic, the first priority should be to fight the virus and protect the economy. But there is a difference between the once-only nature of the corona crisis and the structural nature of existing and future deficits, which makes the call for a crisis tax ever louder. Kevin Spiritus, Assistant Professor at Erasmus School of Economics, gives his opinion in the Belgian newspaper De Standaard.

A blunt redistribution instrument

In economically healthy times, most economists would oppose a wealth tax. It is a crude instrument for redistribution, says Spiritus, because it does not take into account the differences between investors. As a result, economists request a broad-based tax on actual wealth income, including rental income and capital gains. In addition, an annual wealth tax exacerbates the impact of recessions, because the tax remains the same while profits fall.

Exceptional conditions

Even a small annual tax quickly increases in cost over the years. Such an annual wealth tax is therefore only justified in the context of excessive wealth inequality, with damaging effects on democracy, for example. An exception to this rule are unique, occasional shocks, such as a war. According to Kevin Spiritus, the economic damage caused by a one-time wealth tax is much smaller than in the case of an annual collection. After all, assets that have already been acquired are taxed. With a one-off collection, the effect on future decisions of investors remains limited. According to Spiritus, even a small tax rate, with limited economic damage, already yields a lot.

Pressure on the government

If we find ourselves in this unique kind of a situation today, where large assets should be taxed, depends first of all on the pressure on the government to pay off the national debt more quickly. Domestic political pressure to intervene is already increasing and there is a significant risk that European institutions will fail to prevent a new, deeper euro crisis, says Spiritus. The pressure to reduce the debt at an accelerated pace is increasing, to prevent interest rates on Belgian bonds from rising and the debt from growing exponentially. An exceptional wealth tax would then be less harmful than taxes on incomes or large savings in the social sector.

Secondly, it depends on how the impact of the corona crisis can fairly be distributed, says Spiritus. At the moment the government is providing a lot of loans to keep the economy functioning. On the other hand, certain sectors are making exceptional profits during this crisis. The government mainly shares in the losses and less in the profits. Anyone who maintains his income and is able to save extra because of the lockdown, owes this to the government, says Spiritus. The moral question then arises as to whether we shouldn’t ask for an unusual contribution from the people who get through this crisis best, concludes Kevin Spiritus.

Assistant professor

Kevin Spiritus

More information

The entire article in De Standaard can be downloaded above, 23 April 2020 (in Dutch).

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