But those remedies shouldn't include taxing financial transactions or corporate revenue from digital services, or financing through a collective bond issue from countries using the euro currency, according to the study from the Austrian Economics Center. The center promotes conservative, market-driven policies in the tradition of the Austrian school of economics.
It's unclear how long the crisis will last or what the 27 EU economies will look like in its aftermath, but governments should be ready with appropriate policies to respond to shifting circumstances, the study's authors wrote.
For countries, delaying or deferring significant tax payments by businesses and individuals is the best way to address costs of the shutdown forced by the pandemic, the study said. It also advised the use of targeted tax credits and reductions, including accelerated capital allowances for businesses, as well as direct cash support to businesses and workers, including those with reduced hours.
While emphasizing that the crisis is first and foremost about public health and that policies should be designed with this in mind, the study said the pandemic's economic impact is substantial. Fiscal and monetary programs deployed in response to the crisis need to be well targeted and designed, it stated.
To further those near-term goals, institutions such as the European Central Bank should support necessary cross-border trade and travel by deferring or suspending duties and value-added taxes, provide flexible financial backing to resource-strapped countries and follow policies that ensure the post-pandemic recovery will lead to long-term growth.
"Once the health crisis abates, there will be challenges for policymakers in evaluating ways to address new debt burdens, the speed of the post-crisis recovery, and the risks of another wave of infections," wrote the study's authors, Daniel Bunn, Martin Gundinger and Kai Weiss.
In the hoped-for recovery, the governments of Europe should focus on pro-growth income tax policies that support business investment and hiring by reducing the cost of capital, the study advised. This could be done by expanding capital cost allowances and lowering the tax burden on labor. In addition, governments could begin to rely on broad-based consumption taxes as a means to support "fiscal sustainability."
To support those efforts, the authors said, EU institutions should seek to provide an "adjustment period" during which an appropriate growth threshold can be met before fiscal rules are enforced. In addition, support should be given to member countries' pro-growth tax and spending policies by avoiding adoption of contrary policies at the EU level such as "distortionary" taxes on digital revenues and financial transactions, the study said.
Finally, institutions should avoid centralizing post-pandemic tax policy decisions to ensure that countries aren't limited in adopting policies they consider optimal, according to Bunn, Gundinger and Weiss.
The authors took aim at recently debated policies surrounding the pandemic. Discussion of an EU-wide financial transactions tax, they said, ignores problems that would ensue for capital markets and investors. Similarly, a prospective temporary wealth tax for the bloc would be detrimental to post-crisis opportunities for growth, the study asserted.
Countries should also reconsider digital services taxes as a solution to fiscal shortfalls during and after the pandemic, the authors said.
"Designing tax policy around a particular industry, even if that industry is currently flourishing, could have detrimental impacts down the road," they stated, adding that because Europe already lags in tech investment, pursuing a policy that's harmful to that sector would be shortsighted.
The authors criticized a proposal for Eurobonds — wherein debt issued by the 19 euro-currency nations would be bundled into a single security — as too risky because of the member governments' highly divergent fiscal and tax policies. Eurobonds, they said, would worsen the existing moral hazard created by the permanent EU stabilization fund and the central bank's bond buying programs by making it easier to collectivize debt and prompting more irresponsible government spending.
"Temporary policies to respond to the pandemic should be replaced with measures that support sustainable growth," Bunn, who is vice president of global projects at the Tax Foundation in Washington, D.C., told Law360. "Shortsighted stimulus measures or tax policies that harm investment and hiring would make the recovery effort more challenging."
--Editing by Vincent Sherry.
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