Many working people are expecting greatly reduced or no wages in 2020. The US Treasury wisely extended the tax-payment deadline to July, but that only solved half the problem. Now, millions of households and small businesses will owe taxes on their 2019 income at exactly the time when they can least afford it: when the economy will — we hope — be beginning to recover.
Another modification is needed. To complement both the needed rescue bill, which provides 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 Jan. 1, 2020, through June 30, 2020, and extend the filing deadline so payments are due Oct. 15, 2020.
This isn’t crazy. 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 wages from 2019 with the first half of 2020, they will drop into lower tax brackets, increasing their refunds just when they need the money most.
The boom preceding the pandemic will have businesses facing large 2019 tax payments in July — but tax year 2020 will be the exact opposite. The economic collapse will mean large losses for all of 2020, even if the economy begins to recover in the second half. Come April 2021, many businesses will be forced to carry losses into future years. But with taxes due this July, we can expect a liquidity squeeze that 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, avoiding the current schedule, which would collect large tax payments upfront and lower payments in future years.
The Treasury and the Internal Revenue Service will need to designate when the new tax year, beginning on July 1, 2020, will end — presumably either Dec. 31, 2020, or 2021. Under either end date, both businesses and households would be expected to pay taxes for the two tax periods based on estimated smoothed income.
States, too, would have the option of adjusting their tax schedules to conform.
This change would reduce federal 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 currently being provided are merely a bridge. For small businesses, staying alive will require a recovery in consumer spending and demand. An untimely tax bill this summer could force many closures and untold lost jobs. Without productive jobs, and sustained economic growth, future deficits would rise even more.
In the past three weeks, unemployment has increased by a whopping 22 million, well over 10 percent of the total workforce, and hours worked have been cut sharply. The vast majority of the job losses have been in the hospitality, leisure and retail trades. A reasonable one-time adjustment in taxes would lift demand and save thousands of small businesses and millions of jobs.
The deficit hit wouldn’t be as bad as you might imagine. Over a 10-year budget projection, the impact on deficits would be trivial. In fact, accounting for the jobs that are saved by our 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.
This piece originally appeared at the New York Post
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. This piece was adapted from Economics21.
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