The Economics of Pandemics

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How the UK Can Use Tax Laws To Kickstart the Economy

Although experts disagree on many things surrounding the pandemic’s impact, one thing is certain: it will be felt in both the micro and macro levels of the economy. From the closures of small businesses to changing government expenditures, no aspect of the economy is untouched by recent events.

Taxation as a means to influence the UK economy

The role of taxes in the economy is undeniable. The reason behind this is simple: it directly influences how much money is in the hands of people. However, there are different schools of thought on how taxes should be used.

One argument is that raising taxes is needed to bring in revenue for the government. In current times, this has obvious benefits. Higher taxes mean that the government can fund welfare programs such as health initiatives and research, unemployment assistance, and business support.

But there are some economists who disagree with this thinking. Raising taxes means people have less money at their disposal. In a recession, this situation can actually shrink an economy further because people are consuming less. Less spending means that the movement of money, which is an indicator of a sluggish economy.

How Taxes can be used in the UK

Employment is crucial in difficult times. Providing workers with regular and stable employment has many benefits for the economy. For example, if a person receives wages, there is less reliance on the government for assistance, thereby freeing up resources for other welfare projects. 

Another way employment is necessary is that a person with a secure job spends money, increasing consumption in the economy. More consumption means more demand; when demand increases, production increases, providing jobs and stimulating spending. In short, the economy is robust and lively. 

The government can use tax laws to incentivize job security by increasing a corporation’s ability to deduct wages against profits in corporation tax. Higher deductions mean fewer taxes, so there is a fiscal benefit for corporations to keep workers employed.

Another way taxes can be utilized to stimulate the economy is by making changes to wealth taxes. Taxes are levied upon income. But different types of income can be taxed differently. It is common practice for the wealthy to turn income into capital gains to lower their tax rates. In this case, setting a minimum tax rate – say, 35% on income and capital gains – could raise more funds.

Finally, another way tax laws can be changed in these times is to completely abolish laws that no longer work. An example in the UK is the corporation tax. This law was formulated at a time when company ownership was much simpler. A person sets up a company, files its paperwork, and operates in the same country.

However, this is no longer the case. It is no longer unusual to see companies with footprints in different countries. The way this situation has been dealt with is bypassing taxation agreements to prevent double taxation. 

Although this is a solution, it is prone to confusion and abuse. Some experts suggest that instead of using the corporation tax currently in place, it should be the owners themselves who should be taxed. This way, they pay for profits and dividends in their names no matter where they live. It is a much easier system to implement and can generate more tax revenue.

Clearly, Covid-19 is not just a health issue. It is also an economic one. To properly address its effects, the new normal does not just refer to the individual behaviour of people, but rather, the way institutions operate.

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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