1. While the health costs of Covid 19 will fall disproportionately on the older, its economic costs will be borne by those below the age of 40. And its consequences will be a feature of the post-pandemic politics in the developed countries.
In fact, coupled with the GFC of 2008, the Cold 19 pandemic has upended the trajectory of intergenerational wealth distribution. The younger generations of today are worse off than their predecessors. They are left with having to finance the generous welfare state for the older generation even as they themselves face a future of economic stagnation and automation-related jobless growth, gaping unfunded pension liabilities, weakening social safety nets, and a secular decline in the aggregate rate of returns on investments.
An article in FT writes,
As governments begin to plot a path out of the crisis, generational redistribution is likely to become one of the dominant political themes. Having now watched them suffer two economic cataclysms in just over a decade, there will be strong pressure for older generations to repay the favour and help millennials get back on their feet. According to Ana Hernández Kent, a policy analyst at the Federal Reserve Bank of St Louis, many millennials in the US should be entering their peak earning years. Instead, the combination of the 2008 financial crisis and coronavirus is a “double blow” that could amount to a devastating setback. “That Great Recession has really followed them for the past decade or so,” she says. “Even as of the fourth quarter of 2019, millennials were still below, in terms of wealth, where we would expect them to be based on older generations at similar ages.”
... According to Carnegie Mellon University economist Shu Lin Wee, limited career mobility after the financial crisis meant that millennials were caught between two wholly unsavoury choices: stay in jobs where they were being underpaid due to lacklustre salaries set at a time of high unemployment, or change career path into areas where a lack of experience means starting out further down the ladder. Ms Shu says the wage scars of a recession could drag on a person’s income for up to 20 years. Ms Kent’s analysis presents a similar conclusion. Even before coronavirus, she calculates that the typical older millennial family’s median wealth — what they own minus what they owe — was around a third lower than where they should be compared with previous generations at the same stage of life. Many of those trends are now likely to be exacerbated by the coronavirus crisis. Millennials of all races are more likely to be on short-term, temporary or zero-hours contracts — the sorts of jobs in restaurants, cafés or the gig economy which have been most vulnerable to being cut during lockdown. The same is true for the members of Generation Z, the cohort younger than millennials, who have already entered the workforce. The St Louis Fed estimates as many as 16 per cent of US millennials do not have the immediate means to cover an emergency expense of $400. For black millennials in particular, that figure rises to 32 per cent.
In simple terms, demography has become an important dimension to the debate on widening inequality. The young-old divide is as much important as the rich-poor one. On most indicators of incomes and well-being, there is a widening trend between the younger and older generations. Inter-generational mobility is at record lows, and cost of education and home ownership have risen sharply to become prohibitive for the millennials.
2. The inter-generational problem, at a time of record public debts, makes increasing tax revenues ever more important. The massive fiscal stimuluses in the aftermath of the pandemic has seen fiscal deficits and debts balloon to unsustainable territory. It is estimated that 20 of the largest economies have so far provided $5 trillion of fiscal support, or 7% of their national incomes. The reckoning may have arrived.
The FT writes about a salient target, multinational corporations. These entities have, in recent years, benefited from tax avoidance strategies, which the IMF estimates deprives governments off at least $650 bn a year.
In the UK, more than 50 per cent of the subsidiaries of foreign multinational companies currently report no taxable profits, according to a 2019 study by Oxford university research fellow Katarzyna Bilicka. In the US, 91 companies on the Fortune 500 index, including Amazon, Chevron and IBM, paid an effective federal tax rate of zero in 2018.
Amazon, the highest valued corporation, is the exemplar, the most efficient purveyor of tax avoidance. It paid little or no federal tax in the US for years even as it benefited from tax credits from local governments.
Amazon enjoys the benefit of tax deduction accorded to the cost of stock based compensation.
The article writes about the pioneer in tax avoidance, General Electric under Jack Welch,
Dozens of interrelated factors have eroded the system for taxing multinationals over the past half century; falling rates, ever increasing cross-border capital flows, hard-to-resist loopholes, and aggressive incentives from states desperate to attract multinationals. Since the late 1980s, there has been a complete change in mindset, one pioneered and taken to its extreme by General Electric, America’s biggest manufacturer by market capitalisation for most of the past 40 years. Under the late Jack Welch, who ran the company from 1981 to 2001, a tiny corporate tax team was transformed into a money-spinning entrepreneurial machine, with 1,200 tax lawyers spanning five continents. The fruits: between 2008 and 2015 the company not only paid no federal income tax in the US, according to research by the Institute on Taxation and Economic Policy, it booked positive tax benefits worth more than $1.3bn over the seven-year period... One of the first tax experts hired by Welch was John Samuels, a tall, bowtied former Treasury official. By the time he left GE in 2014, Mr Samuels was presiding over what was dubbed the “Harvard of tax departments”.
Efforts towards reforming taxation of multinationals and digital service companies are already underway. There are two pillars to the reforms being spearheaded by the OECD. The first pillar is about strengthening the right of countries to tax corporate income from sales on their territories, regardless of where company is located. The second pillar is about a minimum level of tax applied to all multinationals.
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