Tax Policy Reforms to 2021: Special issue on tax policy during the COVID-19 pandemic

The OECD report provides an overview of the tax measures introduced during the COVID-19 crisis in almost 70 jurisdictions, since the beginning of the pandemic. The report covers all OECD and G20 countries, as well as 21 additional jurisdictions for members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. The report explores how tax policy responses have varied across countries and evolved over the past year.

The report also offers some recommendations on how tax policy measures can be adapted to address the short-term challenges facing countries. In particular, it sets out some guidelines on how countries can improve the targeting of emergency relief and implement recovery-oriented fiscal measures as they emerge from the grip of the pandemic, and ease mobility and other constraints. It also provides a brief overview of the work that the OECD will do in the future to help countries review their tax and spending policies in the post-crisis environment.

Key trends in economic and tax policy

The COVID-19 outbreak has led to a global health crisis and a sharp decline in economic activity that is unprecedented in recent history. In just a few months, the COVID-19 pandemic has gone from a health crisis to a global economic crisis, the scale of which is still developing a year later. The COVID-19 pandemic caused a much larger reduction in global GDP than the global financial crisis in 2008, reaching almost 10% in the first half of 2020 and about 3.4%, overall, in 2020. The recovery has begun, but is still far from complete.

The successful development and gradual introduction of effective vaccines has significantly improved the prospects for sustained recovery, but uncertainty remains high. The latest OECD economic survey forecasts global GDP growth of 5.6% in 2021 and 4% in 2022. However, considerable uncertainty remains. A significant recovery in economic activity depends on the effective deployment of vaccines around the world and the continuation of supportive fiscal and monetary policies to boost demand. Due to the continued spread of the virus and its variants, targeted mobility and activity restrictions may need to be expanded or re-introduced as new outbreaks occur, which may limit the rate of recovery.

There are also growing signs of divergence between countries, sectors, and households. Expanded mobility curbs and restrictions will constrain growth in some countries and service sectors in the near term. Additional factors may lead to different outcomes in different countries and regions, including differences in vaccination rates and the degree of political support. The crisis has also unevenly affected households: the poor, women, and younger generations bear higher economic costs. Without strengthened policies, both fiscal and structural, there is a serious risk that the recovery could be uneven in both pace and scale among households, companies, and countries.

The government's response to the crisis has been unprecedented since the outbreak of the pandemic. The scale of government support to households and businesses has varied, but in many countries it has reached unprecedented levels. Fiscal packages often include a wide range of measures, including loan guarantees, job retention schemes, direct transfers, enhanced access to benefits, and tax measures. Strong and timely financial support has played a vital role in maintaining revenue, maintaining jobs, and keeping businesses afloat.

As part of these broad fiscal packages, tax measures have played a significant role in helping businesses and households in crisis situations. In the first half of 2020, in response to the widespread lockdown, tax measures in many countries focused almost exclusively on emergency relief. Last year's report on tax and fiscal policy in response to the coronavirus crisis highlighted that many of the tax measures were aimed at easing businesses ' cash flow problems, to help avoid exacerbating problems such as employee layoffs , temporary inability to pay suppliers or creditors, and, in the worst case, business closures or bankruptcy. Countries have also introduced tax measures to support households, although other instruments, including direct transfers and increased access to social benefits, have often played an even more prominent role in providing direct assistance to households.

Many of the tax measures introduced in the early stages of the crisis have been extended, with some being modified to channel support to households and businesses most affected by the crisis as it progresses. Some countries have expanded eligibility for beneficiaries not initially covered by these measures, or increased the generosity of initial assistance measures. As the pandemic has developed, some countries have increased targeting to ensure that support is more effectively targeted at those most seriously affected, especially when Governments have moved away from general prohibitions to more selective and targeted containment measures.

Tax packages have also changed, with an increasing focus on recovery-oriented incentives, in addition to crisis management provisions introduced in the early stages of the pandemic response. As bans and other containment measures began to ease after the first wave of the pandemic, countries began to introduce recovery-oriented tax measures, including, among others, corporate tax breaks for investment, as well as lower VAT rates for the most affected sectors. In most countries, these incentives have co-existed with long-term assistance measures.

Another important trend observed over the past year is that an increasing number of countries have introduced or announced new tax increases. In contrast to the emergency phase of the crisis, a number of countries reported tax increases in the second half of 2020 and early 2021. Among these long-term tax increases, some represent a continuation of pre-crisis trends, such as increases in fuel excise taxes and carbon taxes. On the other hand, a slight increase in taxes means a departure from pre-crisis trends. In particular, a number of countries have introduced tax increases for high-income earners, including increases in the maximum personal income tax (personal income tax) rates reported in seven countries, and the transition from a fixed system to a progressive personal income tax system in the Czech Republic and Russia. In addition, in contrast to the downward trend in statutory corporate income tax (CIT) rates in recent decades, the UK has announced an increase in the CIT rate from 19% to 25% for profits over £ 250,000 from April 2023.

Despite some general trends, there were marked differences between regions and countries in terms of the size and types of tax packages, partly due to the different prevalence of the virus and different approaches to containment. Countries with strict isolation policies generally introduced more comprehensive tax support measures, while countries with less restrictive containment measures generally introduced fewer COVID-19-related tax relief measures. The types of tax measures imposed by countries partly reflect the timing of the virus outbreaks. For example, in the Asia-Pacific region, many countries that were at the epicenter of the pandemic in late February and early March 2020 managed to effectively contain the spread of the virus and subsequently introduce more incentive-oriented tax measures than in other countries that are still struggling with a large number of infections.

The scale of tax policy packages also reflects countries ' financial space and their ability to rely on central bank support. Some developing countries and countries with economies in transition have entered the crisis with more limited financial capacity, especially in Africa and Latin America. In addition, some developing countries and countries with economies in transition have not been able to use monetary policy in response to the crisis in the same way that advanced economies have. Overall, many developing and emerging economies had fewer opportunities to provide financial support to households and businesses than other countries. The report notes that countries with higher tax-to-GDP ratios have introduced larger and more comprehensive tax packages.

The tax policy response reflects other country factors. The types of measures introduced depend on the architecture of the country's tax systems. For example, in emerging market and developing countries, support for household income through the IIT was less, since most low-income individuals are not subject to the IIT in these countries. More generally, with a narrow tax base, countries had fewer opportunities to provide support or incentives through the tax system. The size of the informal sector and the administrative capacity of the Government also affected the scope and form of tax support. Finally, with a few exceptions, the tax increases announced so far have been concentrated in OECD countries, perhaps reflecting the fact that they are among the countries that have introduced the most generous support packages.

Recommendations

The report highlights the importance of avoiding a premature end to aid, but increasingly targeting severely affected businesses and households. Supporting hard-hit households is essential to mitigate the uneven impact of the crisis and reduce the risks of rising poverty. Similarly, aid should remain available to businesses in highly restricted sectors. Targeting has become more possible with more information about the economic and distributional effects of the crisis. For those sectors where support ceases, this should be done carefully to avoid sudden spikes in the tax burden or a "cliff" effect, for example, by phasing out support. Where support is extended, this should be done in a way that avoids the accumulation of problems in the future, for example, by favoring "soft landing" approaches, such as converting tax deferral into interest-free tax payments.

As the economy resumes, fiscal stimulus, including through well-designed fiscal measures, can play a significant role if economic activity remains sluggish. Recovery-oriented stimulus policies should be considered if consumption and investment remain persistently low, when containment measures are lifted and activity is allowed to resume.

However, where the economy is recovering, the size and duration of the stimulus packages may need to be reduced, as the stimulus measures can have a pro-cyclical effect if they are sustained after the economic recovery is on solid footing. More generally, policy flexibility will need to be maintained, as continued constraints make traditional stimulus measures somewhat less effective and make the timing of policy implementation more difficult.

For an incentive policy to be effective, it must be carefully timed. The introduction of recovery-oriented incentives while maintaining strict restrictions may be ineffective and even undermine the main goal of public health-to contain the spread of the virus. In fact, there is evidence that some of the tax incentives introduced after the first wave of the pandemic have had less impact than expected because they were introduced while the restrictions were still in effect, or because they promoted greater social interaction.

The stimulus measures should be temporary and target areas where equity needs and fiscal multipliers will be highest. Temporary incentives encourage businesses and households to increase their spending and investment and limit the impact on the state budget. To ensure that the stimulus measures are temporary, a clear end date (with the possibility of a temporary extension) may be required, or their duration may be linked to the achievement of certain results (for example, economic recovery in certain sectors, employment levels). In addition, incentive policies should target areas where they are most likely to lead to additional consumption and investment. For example, non-targeted tax measures to support household consumption will partially subsidize spending that may occur anyway, especially among higher-income households that have accumulated additional savings during the pandemic and will seek to consume after the restrictions are lifted. On the other hand, income support aimed at less affluent households will have a higher multiplier effect, in addition to being more progressive. In terms of corporate taxation, tax breaks based on expenses tend to result in more significant additional investments than those based on profits.

Governments should also prioritize measures that support the recovery of the labor market and the recapitalization of businesses. Given the unprecedented job losses resulting from the crisis and the risks of a long-term negative impact on labor markets, tax measures can be used to encourage businesses to retain their workers and hire new employees. For example, you can consider a temporary and targeted reduction in the employer's social security contributions. To mitigate the impact of the crisis on the capital structure and solvency of companies, tax measures can also be used to support the recapitalization of businesses. Measures may include temporary schemes that allow companies to exempt some of their profits from taxation by reflecting them in a capital reserve aimed at restoring their capital. Such schemes can be restricted and targeted at SMEs and are accompanied by strict rules to prevent any abuse. However, it is important to note that while tax measures can be useful tools, non-tax measures are likely to play a more important role in supporting employment and recapitalizing businesses.

Tax incentives should be aligned with long-term environmental, health and social protection goals. Incentive policies can simultaneously promote recovery and achieve long-term goals. For example, targeted support for promising clean technologies can spur recovery and help accelerate the transition to a carbon-neutral economy, especially when combined with greater efforts to set carbon prices. Special tax incentives can also be provided to support businesses adapting their workplaces or premises to the enhanced health protocols. Finally, incentives should be aligned with social goals and avoid regressive influences.

The full version of the review can be found here