Tax and fiscal policies after the COVID-19 crisis

Abstract

The COVID-19 pandemic has caused a significant deterioration in public finances, adding to pre-existing strains from long-term structural challenges including population ageing, climate change, rising inequality, digitalisation and automation. This report, originally prepared for G20 Finance Ministers and Central Bank Governors at the request of the Italian G20 Presidency, considers the challenges and opportunities of developing public fiscal policy strategies as countries seek to "build back better". The report focuses in particular on how tax policy can be designed comprehensively so that fiscal systems can deliver a balance of equity, growth and sustainability, highlighting some of the key considerations that policymakers should take into account to ensure optimal tax policy design and the successful implementation of tax reform. Tax and fiscal policies after the COVID-19 crisis 4  TAX AND FISCAL POLICIES AFTER THE COVID-19 CRISIS © OECD 2021climate policies, including but not limited to carbon pricing, would help mitigate leakage, allow emissions reductions at a lower cost and improve access to and development of low-emission technologies. Such co-operation has the potential to boost economic growth and make the transition less costly.The options for public finances will depend heavily on country-specific circumstances. For some countries, especially those with low-incomes, increased domestic resource mobilisation will be needed to fund additional spending, whereas countries with already high levels of taxation and spending may need to reprioritise expenditure. The optimal combination of fiscal instruments will depend on a wide range of country-specific factors, including current levels and structures of taxation and spending, the country's institutional setting and the preferences and perceptions of its citizens. The need to focus on domestic resource mobilisation is particularly acute in developing countrieswhere tax revenues as a share of GDP were already low prior to the COVID-19 crisis. Using the tax system as a lever to finance their development and the attainment of the Sustainable Development Goals is a priority for many developing countries. In addition to the aforementioned reforms, developing countries could also improve the design of their presumptive and simplified tax regimes in order to induce workers and businesses to operate within the formal economy, broaden tax bases by abolishing ineffective tax incentives for investment and inequitable tax expenditures, and better use health taxes to increase funding of the healthcare sector.The political economy aspects of tax reform are crucial. Significant fiscal changes will not only require good policy design, but effective policy communication and consensus-building if political acceptance is to be secured. The externalities of public finance choices make international dialogue and co-operation imperative to counter structural challenges. The attitudes of citizens towards taxes will also impact how tax systems can be designed. Providing credible an...