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Will the COVID-19 Induced Ballooning Budget Deficit Lead to More Efficient Taxation?

Sunday, April 19, 2020 9:41

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As each nation engages in a large Keynesian government expenditure expansion to reduce the short run economic impacts of COVID-19, this will create a huge budget deficit for every nation. If every nation faces a budget deficit, then cross-country capital flows (i.e China buying U.S bonds) is unlikely to be a key mechanism for a given country to achieve a dynamic balanced budget. This logic suggests that future taxes will rise. If higher taxes reduce economic growth and given that we need future economic growth to help our economy to recover, COVID-19 could help to bring about tax reform focused on economic efficiency.

If this logic is correct then over the next 3 to 5 years, we will see public finance economists in high demand as they devise new tax schemes that both raise revenue and have the least distortionary effects on economic growth.

To repeat my point, we are running a huge budget deficit now. We need economic growth in the medium term. Future taxes are likely to rise in the medium term. For future taxes to not drag down future economic growth, we need to design these taxes in a way to create strong dynamic incentives to invest in capital. The demand for public finance economists will grow.

Source: http://greeneconomics.blogspot.com/2020/04/will-covid-19-induced-ballooning-budget.html

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