Taxation During a Pandemic

The COVID-19 pandemic, the worst global health crisis in a century, has caused governments to spend unprecedented levels to ensure the survival of people and services. The result is that economies across the region have experienced a drop in tax revenue. This article examines how tax authorities can combat this problem. In particular, we discuss the need for financial management reform and tax reform in developing countries. Here, we will discuss the pitfalls and benefits of such reform.

The United States has 46 states that impose general sales taxes. These taxes account for roughly one-fourth of state tax revenue. Moreover, many cities and counties impose their own sales taxes. General sales taxes are based on the dollar value of the items they tax, and move proportionately with the amount of money spent on those items. The COVID-19 pandemic has reduced consumer spending to an unprecedented extent. This reduced spending disproportionately on services, which were not taxed as heavily as goods.

In the last fiscal year, total state tax revenues decreased by $46.4 billion from their peak before the outbreak. These figures are based on average tax revenue across four quarters. As a result, the sudden drop in tax dollars left state tax collections just 9.6% higher than the year before the COVID-19 pandemic struck. However, the drop in state tax revenue has largely been offset by larger monthly tax receipts due to the postponement of April filings.

Despite the underlying trends, income taxes fell by about 30% during the second quarter of 2020, and recovered by 99.7% in the third quarter. While income taxes declined, the tax revenues from higher wage earners rebounded despite the lack of services. Higher-wage earners teleworked, while lower-wage earners lost their jobs in the service sector. Sales tax revenues remained strong during the pandemic, and online purchases continued to boost revenue.

State and local governments also suffered from the COVID-19 epidemic. Not only did the epidemic wreak havoc on the U.S. economy, but it also affected the state and local governments that rely on sales and income taxes to finance schools and roads. In response, the state and local governments are likely to need to increase their expenditures to ensure the survival of residents and to continue providing essential public health services.

While the federal government is providing tax reliefs to combat the effects of Covid-19, state and municipal governments have taken similar actions. These efforts, however, are not sufficient and require further consideration. In order for Brazil to stay on track with international guidelines, structural tax reform needs to be considered. This reform should focus on simplification and efficiency. The Covid-19 pandemic may make tax minimization intolerable for society.

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