How We Could Build A Crisis-Proof Economy

We are currently seeing companies of all sizes getting into financial difficulties because their revenues are falling to zero. How can we avoid such a situation in the future?

I am not an economic expert. But at the moment it’s obvious what the biggest problem for a company in a global crisis is: revenues are falling away, but costs are continuing to run.

Governments around the world are responding with huge bailout packages, placing an enormous burden on their national budgets. The debts now being incurred will weigh on national balance sheets for many years to come.

But it is not only debts that are being incurred. At the same time, tax revenues are falling significantly in the crisis. The states are thus accumulating massive debts, while revenues are shrinking dramatically. Experts are already warning of a global recession.

There is currently no alternative to government aid for the economy. At the same time, the support often does not reach those who need it in time.

Firstly, it takes far too long to decide on these measures and prepare their implementation when the crisis is already here. Secondly, many entrepreneurs find it challenging to provide the necessary evidence in time that is required to ensure that the aid money is paid out.

As a result of these delays, and because the aid available is still insufficient for many, despite the vast sums involved, millions of people around the world have already lost their jobs or will lose them in the next few days and weeks.

We are therefore dealing with a three-stage chain of events:

1. companies lose significant portions of their revenue or lose it completely.

2. states take on massive debts to take countermeasures.

3. aid is not enough, and mass unemployment and impoverishment of large parts of the population are the results

How can we avoid such scenarios in the future?

Extending the burden of coming crises over many years

Global crises, which always hit the economy hard, will not spare us in the future either. We should ask ourselves how we can be better prepared in the future.

The companies

These days one often reads sarcastic comments in social media when there are reports of entrepreneurs in distress.

If the entrepreneurs had built up sufficient financial reserves in recent years, they could now wait out the crisis without any problems, they say.

Basically, this is correct.

If a company has enough money in its account to survive three or four months without income, it does not need state aid during the crisis, does not have to lay people off, and can continue to pay taxes.

In reality, however, we know that it is utopian for many entrepreneurs to build up such reserves. Freelancers, owners of small businesses, and other small entrepreneurs in particular live from hand to mouth month after month. So, where are the funds for financial crisis prevention going to come from?

My suggestion is: Let entrepreneurs only pay taxes when they have reached a legally defined savings target for coming crises.

Every business would be obliged to pay part of its turnover into a savings account until it could live on the money saved for three months (or longer — depending on what politicians would agree on).

The amount to be saved each month could be determined by looking at what taxes the company would otherwise have to pay. So instead of paying taxes from the beginning, the company would instead be obliged to save a nest egg.

The amount to be saved would be based on the company’s current monthly costs.

So if my business has a running cost of $10,000, I would have to save $30,000.

If the costs change because I hire more personnel, I take out a loan for new means of production, or my calculated tax burden increases because my sales increase, the obligatory savings portion must also be increased.

If my monthly costs fall, the savings amount must, of course, also be adjusted.

The nations

At first sight, it seems that the states and their tax coffers are the ones who suffer from my proposal.

If companies are to save for themselves first, sometimes perhaps for years, before they start paying taxes, it seems irresponsible at first.

Tax revenue is needed to maintain public infrastructure, to pay civil servants, to support the needy, and to finance a thousand other enormously essential things.

Anyone who earns money is therefore entitled to a share of these costs. There is no alternative to taxing income and profits.

Would it not then be madness to implement my proposal?

Imagine if the scheme was introduced and a large corporation, which otherwise pays millions in taxes but has hardly any financial reserves, suddenly had to pay no more taxes.

The state would be deprived of this vital revenue for months or years — depending on how long it takes to save the necessary amount.

Well, let’s look at what happens in a global crisis: The same corporation applies for state aid, gets it, and yet initially fires thousands of employees and a few months later goes completely bankrupt.

The state has then lost not only the aid paid out but also the tax revenues generated by this company in the long term. Also, the dismissed employees are now a burden on the state treasury.

Firstly, this is because they will be dependent on social benefits in the future and secondly because they will no longer pay income tax when they no longer have a job.

In this case, therefore, the state will have to bear at least as significant a financial loss as in the scenario I have proposed. The only difference is that, in the event of a crisis, this damage is massive in the shortest possible time and then becomes worse over months and years.

The costs of a crisis cannot be planned, so the state can never be well prepared.

On the other hand, the tax losses caused by a scheme such as the one I propose are predictable and therefore, can be planned.

A state that does not immediately run into economic difficulties due to the occurrence of a global crisis, such as the one we are currently experiencing with the Corona pandemic, would be healthy and resilient.

All businesses and the population would be safe from an economic shock, and social peace would be assured. The financial markets would have no reason to panic, and the incentive to set up businesses would increase.

Implementation at the national level — issues to be resolved

Even if I argue in favor of introducing this regulation in every country in the world, implementation would, of course, have to be planned by each state individually.

The tax systems are different everywhere, and company law also varies significantly from nation to nation. In each country, a commission of experts would have to draw up plans tailored to the individual state.

It would have to be clarified in each case how the amount of reserves to be set aside should be calculated. What is considered a necessary expenditure of a company, what is regarded as a luxury? Is the current tax liability a suitable indicator for the amount of the monthly savings amount, or are there better indicators that can be used as a guide?

How is it guaranteed that the saved funds are only used in case of a crisis? Would it make sense to deposit the money in blocked accounts that would be released by the government in a precisely defined crisis?

How can the financial administration ensure that each company has the appropriate amount of savings available at all times? Monthly adjustments of requirements must be easily possible if the general conditions in a company change.

Should companies’ existing reserves be forcibly reallocated to the new savings plan? If necessary, this could help avoid excessively drastic tax losses when the new system is introduced.

These and a thousand other detailed questions would undoubtedly have to be clarified before my proposal could be implemented. However, I do not believe that this changes the viability of the basic concept.

Ultimately, the national economy that is the first to establish such a crisis protection system would have a substantial competitive advantage in the event of another crisis over any state that does not have such a system.

Outlook

The proposed model is basically simple. In its simplicity, it certainly seems naive at first, especially since, as I mentioned, I am no economic expert.

But the premise is difficult to dispute: If every company today, from ice cream vendors to multinationals, had financial reserves for several months, the shutdown of the economy would hardly be a problem.

Perhaps this article will find its way to a tax expert who feels inspired to think about the feasibility of fiscal measures.

Perhaps an economist reads my lines and feels challenged to do the math.

Politicians, journalists, entrepreneurs, and experts of all fields are welcome to take my proposal apart, criticize it, and prove its impossibility.

I have not written this article because I believe I am right. I simply believe that each of us, according to his or her abilities, should also think about the big things that are far beyond his or her sphere of competence.

If I start a discussion, this article has served its purpose. Someone else may find better solutions than those I propose. But if that person discovers that better solution by criticizing mine, that would be wonderful.

René Junge a published author writing on ILLUMINATION.

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