Why Tax Was—And Will Remain—at the Epicenter of a Covid-19 Recovery

Taxes, the central source of most governments’ revenue, play a critical role in everything from funding public services to incentivizing organizational behavior, and attracting capital in a competitive, global economy. It’s no surprise, then, that tax laws and regulations are in a constant state of flux, a phenomenon only accelerated by the Covid-19 pandemic.

Since the pandemic began, more than 138 jurisdictions have amended their tax laws and regulations to alleviate the economic impact, according to EY response trackers. Many of these tax legislative changes have sought to ensure organizations remain solvent, individuals are financially protected, and economies remain competitive.

Some of these measures have included deferred tax filing and payment obligations, establishing employment retention schemes, as well as introducing credits and incentives. To date, measures have also included more than $27 trillion in support and stimulus injected into global economies (including through quantitative easing), a figure that exceeds the combined GDP of the United States, Germany, and Japan.

The response is a stark reminder that while free markets and finance are a force for good, governments—and tax policy—remain vital levers in financial crisis management. Together, they play a critical role in protecting people. But while many governments have bolstered economic activity, many countries have still entered a recession, with low economic growth and high unemployment the norm.

In pre-pandemic times, proponents of free markets would have argued for less regulation and government distortion to optimize outcomes for the greater good. But these are not typical times. If governments and organizations are to facilitate an economic recovery, they will need to leverage tax policy for three key reasons.

1. The scale of financial stimulus

The first reason taxes will be front-and-center is simple: governments have accumulated massive amounts of debt to prop up their economies. Both the U.S. and the U.K., for example, are experiencing their highest government-to-debt ratios since World War II. While many countries are currently looking to sustain economic activity by keeping tax rates low, eventually, these debts—and associated deficits and interest payments—will see governments seek to ‘plug the gap’ and pivot from low rate, pro-growth policies to those that are revenue-raising.

2. Shifting supply chains

Second, countries are likely to use their tax policies to encourage companies to make goods closer to the consumer to diversify supply chains. When the pandemic hit and borders shut abruptly, many countries found themselves without key goods (drugs, protective equipment, and many other items).

3. Long-term, sustainable growth

The final reason taxes will continue to be play a central role in the global recovery is also the most profound: there is widespread perception that the Covid-19 pandemic has enabled the rich to get richer and the poor to get poorer. This has exacerbated social inequities and has refocused governments on income inequality. As a result, we can expect governments to focus on taxing high net-worth individuals and big businesses more, and people on lower incomes and smaller businesses less. In Australia, for instance, the 2020 federal budget has already provided numerous tax breaks for those earning below certain thresholds.

The future of tax and tax administration

The increasing role of tax administrations will loom large. They have been instrumental in alleviating cash-flow problems for organizations and individuals, processing and administering more than $27 trillion in global stimulus, and extending tax filing and payment deadlines. For many people, they have served as a crucial source of financial relief and wealth distribution. For many organizations, they have also suspended matters around tax controversy and litigation, freeing people and financial resources to focus on immediate crisis management.

In recent years, tax authorities around the world have also increasingly developed into world-class technology centers, processing real-time data and transactions, and communicating globally with other tax authorities and governments.

As a result, of the vast swathes of data they possess and their ability to sift and sort through this, tax authorities have even been tasked by governments during the Covid-19 pandemic to utilize data outside of their traditional remit for everything including contact tracing to identifying the right people eligible for government stimulus. Not surprisingly, they are often the first to identify fraud, and in the past, have even been asked to track carbon emissions for companies.

The pandemic will only further accelerate the ongoing digital transformation of tax administrations around the world. Some of this will benefit taxpayers, such as being able to have improved “virtual access” to their revenue authority contacts. But for others, this will only compound tax risk and controversy.

I remain a firm believer in free markets and do believe finance is inherently a force for good. The global response by businesses to step-up to make personal protective equipment for health care workers and first responders is but one example of this impulse during the height of the pandemic.

I also believe the way governments and businesses are responding to the pandemic affords an opportunity to close widening trust deficits with stakeholders and rebound to a new, better “normal.” We see this in the commitment more and more businesses, including EY, are making to ESG reporting criteria (Environmental, Social, and Governance)—resulting in a focus on taking care of their people, reducing their carbon footprints, and codifying their governance to help ensure their commitments to those goals are reached.

But as someone who works day-in and day-out with tax administrators, tax executives, and tax policymakers, I also must acknowledge that taxes—and more specifically, tax changes—are here to stay, and will continue to coexist with the invisible hand of the market.

The corporate tax function is the arbiter of change. The increasing dependency on the tax function across most organizations was steadily evolving before the pandemic. Many of these organizations are in fact reimagining their entire tax operating model to try to keep up with the onslaught of legislative and regulatory change, leaps in technology, and ever-increasing demands for multiskilled tax professionals even as they face cost pressures. These transformations have accelerated dramatically since the onset of the Covid-19 pandemic.

The tax function as a force for good

Fittingly, the increased responsibility on the tax function is testament to the fact that finance can be a force for good. During the early 1980s, the tax function was seen primarily as a cost center. By the 1990s, it evolved into a value center for some, triggering a backlash. By the early 2000s, the tax function spent more time on risk management. Today, because it is more tied to other business units than ever, the tax function can emerge as a trust center that helps contribute to a better working world.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kate Barton is EY Global Vice Chair – Tax

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.