As we have watched the medical horror of COVID-19 evolve, the shadow of large, long term and unequally distributed economic impacts hangs over us. The restrictions mean many people will lose livelihoods, face bankruptcy, and similar catastrophes, while others will profit from the disruption. Billions of dollars of subsidies are being handed out to try to compensate for the restrictions and maintain production and jobs.
The economics of taxation tells us how this COVID-19 burden can be more fairly shared, because the problem of sharing the burden of raising a given amount of tax revenue is just like the problem of sharing the burden of a package of restrictions and subsidies to contain the spread of the virus. Tax is one of the oldest topics in economics, from Adam Smith’s maxims for governments wanting to fairly share the burden of taxation (See Book V, Chapter 2 of The Wealth of Nations) to the modern theory of optimal taxation developed by Nobel laureate James Mirrlees (See, https://voxeu.org/article/ideas-james-mirrlees-1936-2018).
What combination of restrictions and subsidies will efficiently and fairly share the cost of fighting COVID19? Economics suggests the following principles:
1. There is no point in bans that cannot be enforced, where enforcement is broadly understood as including social pressure and society’s stock of virtue. Fairness of any restrictions matters because fairness is crucial for enforcement through social pressure and virtue.
2. Measures to contain the virus should not necessarily be imposed equally on all individuals. They have different impacts on different individuals, and what we are looking to equalise is the burden.
3. The burden should not fall too heavily on the already vulnerable. The utilitarian economic argument that a dollar is worth more to a poor person than a wealthy person means that imposing more restrictions and giving fewer subsidies to the already well-off will equalise the burden. There are of course wider justice arguments that come into play here too.
4. There is no point to subsidies that do not affect production. Unless the subsidy is really to mitigate harm to the most vulnerable, rather than to maintain production.
5. The burden should be minimised on those who are highly productive and whose production will be greatly reduced by a proposed ban. Measures that impose a heavy burden with little virus containment benefit are like inefficient taxes. Similarly, subsidies should be targeted at those whose production behaviour is most sensitive to the subsidy. When measuring production, we need to consider all the flow-on effects of the individual’s activity, and for coronavirus policy, the timing of the flow-on effects is particularly important. This is where good economic modelling can help.
6. We should be alert to perverse incentives in the design of restrictions and subsidies. An example of a perverse incentive would be a government measure that leads individuals to reduce production for reasons unrelated to the coronavirus in order to attract subsidies. These sorts of perverse incentives are likely when the government has imperfect information and can be hugely costly. In designing good restrictions and subsidies that make the most of available information society benefits from past government investments in economic education and research.
One thing to note about the sharing of the burden is that we have been talking about individuals. Businesses (and in fact any organization including charities, churches and even governments) for economists are just combinations of individuals, and so economists seek to look behind effects on businesses to effects on the employees, owners, creditors and customers of the business. It is these that really matter.
Even with some rules like these, getting the package of restrictions and subsidies right is no easy task. Even if we have agreed what is the appropriate level of burden of COVID19 containment is. Even if we make the heroic assumption that the government has sufficient information about how different individuals will respond to restrictions and subsidies, and how much they will be affected. For instance, principle 3 about protecting the vulnerable can conflict with principle 5 about targeting subsidies to maintain production - because the vulnerable are probably not those whose production is most sensitive to subsidies.Contemporary economics is a powerful set of analytical tools, but some limitations of the economic approach need to be recognised. Especially by economists, for as my fellow economist Ian Harper has written, economics is a good servant but a poor master (See, https://acornpress.net.au/publications/confessions-of-a-meddlesome-economist). Where objectives are clear and agreed by all, the tools of economics can help us attain that objective efficiently, but the tools of economics don’t help us very much in deciding about what the objectives should be. Economics sidesteps questions of what matters ultimately, but one thing that a crisis like the coronavirus stimulates, is reflection on what life is really about in the end.
About the Author: Paul Oslington is Professor of Economics and Theology, at Alphacrucis College, Sydney. He is also Honorary Professor, PACT, Charles Sturt University and Council Member and past Vice President of the Economic Society of Australia (NSW Branch).