The coronavirus has thrown the economy into a tailspin. Many working people have greatly reduced or no wage income in 2020. To its credit, the U.S. Treasury delayed tax payments for 2019 from April 15 to July 15, avoiding what would have been chaos and widespread failure to comply.
But that only solved half the problem. Now, millions of households and small businesses will owe taxes on their 2019 income exactly at a time when they can least afford it and when the economy will—we hope—be beginning to recover from the Covid-19 pandemic.
Clearly, another modification is needed. To complement both the needed CARES Act, which provides income and financial support to distressed individuals and small businesses, and the Federal Reserve’s massive monetary initiatives, the Treasury should take the bold step of expanding the 2019 tax year to include the period from January 1, 2020 through June 30, 2020, and extend the filing deadline so payments are due Oct. 15, 2020.
This is less crazy than it may sound. Lumping together the first half of 2020 with 2019 for tax purposes would provide timely benefits to working people and small businesses. By averaging their wage incomes from 2019 with the first half of 2020 they will drop into lower tax brackets, increasing their refunds and Earned Income Tax Credit just when they need the money most.
The boom preceding the pandemic will have businesses facing large 2019 tax payments in July. But they will be presented with the opposite situation for tax year 2020. What’s clear right now is that the economic collapse will impose large losses for all of 2020, even if the economy begins to recover in the second half. On April 15, 2021, many businesses will be forced to take loss carryforwards into future years. But the damage from a tax-induced liquidity squeeze on July 15, 2020 will have already forced some businesses to close down, further contributing to skyrocketing unemployment.
Blending the first half of 2020 into 2019 for tax purposes would smooth business tax burdens and avoid the current schedule, which would collect large tax payments up front and collect lower tax payments in future years. The Treasury and IRS will need to designate when the new tax year, beginning on July 1, 2020, will end, presumably either Dec. 31, 2020 or Dec. 31, 2021. Under either end date, both businesses and households would be expected to pay estimated taxes for the two tax periods based on estimated smoothed income. States would have the option of adjusting their tax schedules to that of the Federal IRS.
Of course, this change would reduce Treasury tax receipts for 2020, and widen the deficit for fiscal year 2020. But in the present crisis, the goal in the second half of the year should be getting people back to work and keeping businesses afloat.
Compassionate? Yes. But it also makes economic common sense. The loans and grants provided by the Small Business Administration and Federal Reserve are merely a bridge. For small businesses, to stay in business and maintain their workforce, a recovery in consumer spending and product demand is required. Sidetracking them with an untimely tax bill could force many closures and untold lost jobs. Without productive jobs, and sustained economic growth, future deficits would rise even more.
The current unprecedented crisis merits such a change. In the past three weeks, unemployment has increased by a whopping 22 million, well over 10% of the total workforce. The vast majority of the job losses have been in the hospitality, leisure, and retail trades. Millions of privately owned firms—single proprietorships, partnerships, and Subchapter S corporations—employ an estimated 47% of all private sector workers. A reasonable one-time adjustment in taxes would lift demand and save thousands of small businesses and millions of jobs.
Yes, budget deficits will rise for 2020. But, over a ten-year budget projection, the impact on deficits would be trivial. In fact, accounting for the jobs that are saved by our tax proposal, the budget impact will be positive.
No matter what the deficit, the government is far better able to borrow and absorb the financial shock of the crisis than are small businesses and the people they employ. There would be minor administrative costs to changing the tax calendar year, but by saving jobs and businesses, the benefits to the economy and our national well-being would be much greater in the long run.
Mr. Levy is chief economist, Americas and Asia at Berenberg Capital Markets LLC, and a member of the Shadow Open Market Committee at the Manhattan Institute. Mr. Richard is a former managing director of Morgan Stanley and is a retired professor from the University of Pennsylvania’s Wharton School.
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