A broad spectrum of stakeholders had differing views and placed different emphasis on how governments could raise revenue, where necessary, in the wake of the economic situation resulting from COVID-19. There was broad acceptance that progressivity in income taxes could be increased – possibly through a temporary solidarity surcharge. Tax rates on short term capital returns could be increased to match tax on earned income – but there was disagreement over reduced rates and incentives to encourage longer term investment and entrepreneurial risk taking. There was no general desire to increase headline tax rates on corporates, but measures to combat corporate tax avoidance, as well the possibility of excess profits or rents taxes were raised. While most participants supported multilateral solutions, some thought there should also be greater acceptance of unilateral approaches – including digital services taxes – due to the time delays in reaching global agreements. Green taxes also play a part in revenue raising.

On Tuesday 28 July the fourth roundtable in a series on potential tax policy responses as a result of COVID-19 was held. Sponsored by KPMG International and Jericho Chambers, a more detailed explanation of the program can be found here. This event was attended by 11 stakeholders from a wide spectrum of backgrounds and focused on what potential measures governments might take in order to increase tax revenues. The discussion did not deal with taxing wealth or land, as there will be separate roundtables on those subjects.

The event was held under the Chatham House rule and this note is a summary of the views expressed. There were disagreements and difference of emphasis over some issues. The attendees are listed below1, but all opinions were anonymized and do not represent official views of any organization or any KPMG member firm. Where individuals are quoted, their expressed permission has been obtained.


Chris Morgan, Head of Global Tax Policy, KPMG International began the roundtable by referring to the discussions in earlier roundtables and the five tensions or dilemmas which have emerged (see link above). He noted, in particular, the first tension between the benefit of not raising taxes too quickly - in order to not impede any economic recovery - and the need which governments may have to raise more revenue. In the early roundtables the weight of opinion was to delay tax-raising to support the economy but it had been recognized that many countries may not be able to borrow significantly at acceptable rates and therefore may have to start raising revenue; while many people expected that in the longer term there would be some forms of tax rises generally. He asked participants to give their views during the discussion if they disagreed with that analysis and no one expressed a different opinion. He also explained that the purpose of the roundtable was to focus on “Quick Wins” in the sense that the discussion would be around forms of income, capital, and indirect taxes rather than focusing on wealth and property taxes which many countries may not have and could take longer to implement. These taxes would be the subject of later roundtables.

Respondents thought that in many countries there may be scope to increase income tax by increasing progressivity without having an adverse impact on economic growth. If only a temporary increase in revenue was needed – rather than more fundamental changes to the tax system – a temporary solidarity surcharge may be the most appropriate method.

Progressivity in personal income tax systems

It was noted that even before the current crisis there were many discussions about whether there was sufficient progressivity in personal income tax systems in many countries and jurisdictions. The IMF has carried out a study which suggests that increasing the progressivity within a normal range would not have an adverse impact on economic growth2. It was thought a normal range could be up to around 50% - including social security type charges as well as income tax - although it may be a lower figure for developing countries.

If there was a desire on behalf of a government to increase income tax, the question would arise whether the entire system needed fundamental review (perhaps to increase progressivity) or whether a temporary measure would be sufficient. Applying a surcharge on the amount of tax due under existing rules, for example, the German solidarity tax introduced after Unification, would be a simpler approach than an overhaul of the whole system and would be progressive. First, it would be calculated on the amount of tax due under the existing law – so falling proportionately more on higher rate taxpayers. Secondly, it could also be charged only on wealthier members of society.

It was pointed out that if a surcharge was meant to be a temporary measure, by definition, when it expired it would have a regressive affect which could create an adverse public reaction. Therefore, if and when such a tax was introduced policymakers needed to be very clear on the intention and in the communication. Also, to be effective it is important that taxpayers understand the need for solidarity. An example was quoted of a 0.2% levy on National Insurance that was introduced in Australia in order to fund the gun buyback following the Tasmanian massacre. It was suggested that a solidarity tax could be implemented quickly and may have public support in the current environment - possibly also if it was hypothecated, for example for public health.

Another point made, was that if income taxes are raised, possibilities for arbitrage should also be closed. For example, increasing the top rate of tax may encourage self-employed people to incorporate their businesses. Again, clarity on the policy intentions is required.

The shift towrads indirect taxes

One participant noted that in many countries there has been a shift towards indirect taxes in recent years. This may mean that there is little room to increase revenues in that area which points towards using income tax surcharges to increase the tax take.

There was general agreement that some returns from capital – especially short term gains - should be brought into line with the taxation of income. But there was disagreement over doing this across the board. Arguments were made for providing reduced rates and incentives for entrepreneurial risk taking, long term investing or investing in the green economy; but others argued incentives were distortionary and the tax system should be simplified.

The relative tax burden debate

There has been a debate about the relative tax burden between income from capital and work even before COVID, and participants had differing views on the subject. One noted that while capital is often been taxed at lower rates in many countries and jurisdictions, the fact that in recent years an increasing share of GDP tends to be made up of capital income may suggest that the trade-offs switch round and tax on capital income or gains should be increased. Furthermore, the increase of robotics and artificial intelligence may put greater pressure on wage income in future reducing that a source of tax.

Another participant noted that any change in the tax regime would drive change in behaviour. If tax on capital is increased it would be necessary to create a distinction between short and long term capital income. For example, a higher rate could be applied to “opportunistic” gains but a lower rate would apply to income from entrepreneurial capital in order to encourage investment and risk taken.

Effectivensss of incentives for investing in small businesses and start-ups

The question was raised whether or not the incentives for investing in small businesses and start-ups are actually effective. Arguments have been made, for example in the UK context that many of the reliefs are too generous and the investment would have been made anyway. However, it was pointed out that venture capital is the lifeblood of start-up businesses. An investor will invest across a spectrum and maybe 1/3 of the investee companies will blossom, 1/3 will eventually fail and 1/3 will fail spectacularly. There needs to be some incentive to get start-ups off the ground. It was also suggested that investment incentive could be focused on environmentally friendly activity.

However, one of the other participants strongly disagreed and thought that incentives are actually creating distortions in the system. As capital is globally mobile, incentives in one country were probably draining capital from another. A solution which was suggested was to find ways to ensure that returns to capital could not be structured in such a way that they incurred a zero tax rate. Another participant argued that tax systems should be simpler and fairer and should not be concerned with incentivizing or discouraging particular activities.

Increases in headline rate of corporation tax

There were no calls from participants to increase headline rates of corporation tax, but suggestions were made for some kind of tax on excess profits or potentially a tax on economic rents.

As for corporations, one respondent expressed concerns about ongoing levels of profit shifting, and in particular, the impact this has on employment. It was suggested that unitary taxation and public country by country reporting would reduce base erosion and profit shifting although another participant thought global tax systems are already transparent and there is a problem of too much data now being available with inadequate systems to sort the information and insufficient mechanisms through which to use it. There was no general discussion about increasing the statutory headline rates, but one respondent expressed the view that a global minimum tax rate would increase effective tax rates.

Global excess profit tax

One participant suggested the possibility of a global excess profits tax. This could be based on the OECD Inclusive Framework (IF) Pillar 1 work on the impact of digitalization of the economy. Broadly speaking, under the proposals, which are being discussed by the IF, it would be necessary for multinationals to identify an amount of routine profit and then the remaining residual profit – assuming any existed. Part of the latter would be reallocated to countries where the group made sales on a formulary basis. The excess profits idea takes this one stage further in that there could be global agreement that a return over a certain percentage would be treated as “excess” and potentially taxed at a higher rate. Again, there would need to be a mechanism for allocating taxing rights over this amount. It was suggested this could be a temporary measure, or if it was thought that there is market failure which enables certain companies to make “excess profits” through some form of monopoly, the system could be permanent. It was thought that any excess profits tax would have to be global in nature to be effective and could take a long time to agree on a multilateral basis. Another participant pointed out that using tax to address issues of a monopolistic position is a second best solution; the best would be through competition laws.

Rather than taxing excess profits as such, one participant referred to the possibility to tax rents. The theory being, this would allow an increase of corporation tax on some companies without distorting economic activity. Some forms of rent tax, like a cash flow tax would require some level of global cooperation, but others like introducing an allowance for corporate equity (ACE) would not.

OECD Inclusive Framework Pillar 1 and 2

There were mixed views about whether the OECD Inclusive Framework Pillar 1 and 2 would ever be agreed. Some participants favoured continuing with multilateral approaches, while others thought unilateral solutions were appropriate in some cases including digital services taxes – although it would be preferable if they could be coordinated in some way.

One person raised the issue that the current Pillar 1 could take a long time to agree or may never be agreed. Even if there was agreement it could take several years before countries started to see any revenues. Another participant considered it was unrealistic and would never get agreement. There was some support for countries acting on a unilateral basis by imposing, for example, digital services taxes where they had a need to act quickly. One participant suggested that there was a case for some kind of coordination (not harmonization) of digital services taxes and part of this could be an understanding that they would be revoked if and when Pillar 1 was agreed and began to produce revenues. It was also noted that Pillar 2 does not actually require global agreement and that countries could introduce minimum tax rules on a unilateral basis.

Another participant pointed out that globally there is an attempt to redesign the international corporate tax system (via Pillar 1 and 2) to get rid of underlying distortions and to avoid any race to the bottom on tax rates. This process inevitably is slow. Some participants expressed support for multilateral approaches rather than unilateral ones. It was also noted that the whole of the economy is becoming digitalized and so taxes which apply only to certain digital companies are distortive. Furthermore, digital services tax on turnover may be inefficient.

Increasing VAT

Participants did not favour increasing VAT, but putting excise duties on luxury goods was suggested as a potential indirect tax raising measure.

There was no appetite for generally increasing VAT or sales taxes. It was noted that it might be possible to increase such taxes on luxury goods but it is generally considered better to have fewer rates and exemptions. One participant suggested it would be more efficient to have excise tax on luxury goods rather than a higher rate of VAT.**

Green taxes

Green taxes could be used to raise revenue, but any regressive impact needs consideration.

One participant noted that green taxes - for example on plastics, carbon taxes and fuel duties - were another way of increasing revenues particularly when the demand was inelastic. However, it may be necessary to consider decreasing taxes elsewhere in order to offset any regressive impact.

In terms of generating a greener economy, rather than pure tax-raising, another participant noted that, even where countries do not impose environmental taxes, some companies already make an internal calculation of the cost of environmental degradation caused by their activity. It was suggested that tax policy could be developed to incentivize such an approach.

Inequalities across the global landscape

Looking to the longer term there was general agreement that the current situation has highlighted existing weaknesses in the global economy, but there were very mixed views about the balance between multilateralism versus unilateralism, and short term solutions versus long term reform.

There was general agreement that the current crisis has highlighted certain weakness which existed in the global landscape. In particular, it has exacerbated inequalities between individuals, between corporates, and between countries. One participant suggested that there is a need for a bigger conversation about what sort of societies we want – tax policy then flows from this aspiration. Another noted, that in developing effective tax policy, it will be necessary to take into consideration business interests, corporate finance and capital flows, and political reality.

Unilateralism vs mutlilateralism

There were slightly different views expressed about the balance between long-term and short-term measures and between unilateralism and multilateralism. While some participants stressed the need for longer term reforms, it was also noted that in many countries there is a need to act quickly as they will be facing a financing gap. While some thought that multilateralism was the best way forward, others stressed that unilateral measures should not be demonized and one participant suggested we are now in a nationalistic world where international solutions will not work because agreement takes too long and often conflicts of interest are too great for an acceptable solution for all to be found.