Who should pay for the COVID-19 crisis? : learning from war-time experiences

Abstract

To express the gravity of the unfolding pandemic, world leaders have often used analogies to war. Possibly perceived as hyperbole, the comparison between the pandemic and war can nonetheless be enlightening. A severe, society-wide crisis necessitates rapid mobilisation of resources, which have to be collected from someone, somehow. But how, and from whom? In the immediate perspective, the ‘how’ has three main alternatives, as elaborated by the American economist Edwin Seligman during World War I: “by taxes, by loans, or by paper money”. Governments have initially been able to cover their COVID emergency spending through two of Seligman’s mechanisms. They have borrowed massively, often assisted by their central banks’ purchase of bonds – essentially ‘printing money’. Crucially, and in contrast to most war situations, inflation has remained low, as government-imposed restrictions depressed overall demand. The peculiarities of the pandemic have thus given many governments a respite: average tax rates did not increase in 2021. But once the printing presses stop, taxes will have to be raised. The conundrum for war-time governments across the world, and throughout history, is two-fold. Just as the need for revenue explodes, the public’s perception of what is fair fiscal policy is changing dramatically. War brings unequal burdens and benefits: while some die in trenches, others get rich. In short, it is terribly unfair. Moreover, in the face of a common threat, the principles of equal sacrifice and solidarity are raised to highest public virtues. According to research by Kenneth Scheve and David Stasavage, the total wars of the early twentieth century led to the expansion of progressive taxation in the West. As I show in my doctoral research, the process has neither been a Western peculiarity, nor restricted to mass-mobilising inter-state wars. The pattern has appeared across the world – whether in India or Iraq, in Portugal or Peru – during and after major armed conflicts of all types. Glaring war-time inequality coupled with patriotic notions of equal sacrifices have led populations to refuse anything but distinctly progressive taxes. And so governments have been forced to tax the rich.