Tax Policy and COVID-19: An Argument for Targeted Crisis Relief

Abstract

The COVID-19 pandemic caused a sharp global economic decline. The U.S. government responded to the downturn with record fiscal legislation totaling over $5 trillion, which includes considerable tax relief. Most notably, the U.S. government distributed over $800 billion in three rounds of advanced refundable tax credits (known as recovery rebates, or stimulus checks) to most households. Tax relief has been unprecedented in scale but has often been the product of political circumstances rather than theorized conception. Tax relief thus remains largely undertheorized and politically motivated. This Article examines the U.S. tax policy response to the COVID-19 crisis, focusing on recovery rebates for individuals. It evaluates considerations for reforming tax relief and proposes several changes for future crises. First, the Article recommends targeting credits towards low-income households. This should be accomplished by decreasing phase out thresholds and increasing credit amounts. Second, the Article recommends targeting credits towards households which lost income or whose income did not substantially increase. This should be accomplished by implementing a recapture (repayment) requirement at the end of the tax year from households whose income increased beyond the phase out threshold, subject to a safe harbor. These proposals increase vertical equity and effectiveness, allow increased aid to those who suffered the most and enhance economic stimulus. Additionally, the Article explores arguments for universal benefits and recurring payments. It thereby examines the widely publicized debate on fiscal response to COVID-19 and suggests meaningful improvements to tax policy response for future crises.