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'Significantly higher' taxes rich would cut inequality without hindering growth, says IMF

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'Significantly higher' taxes rich would cut inequality without hindering growth, says IMF

Wed, 11 October 2017
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'Significantly higher' taxes rich would cut inequality without hindering growth, says IMF

(ShareCast News) - In its half-yearly fiscal monitor, the International Monetary Fund (IMF) called for countries around the world to implement policies aimed at reducing inequality, and to seriously consider tax policies and transfers that would hopefully lead to a more even distribution of wealth without damaging growth potential.
Although the world had seen a fall in global inequality over the last few decades due to the economic rise of countries like China and India, internal inequality had risen sharply across the board, especially in countries like China and the United States, leading the IMF to caution that excessive inequality would not only bring about lower economic growth but also quite likely polarise the political landscape.

"Progressive taxation and transfers are key components of efficient fiscal redistribution," the Fund's Fiscal Monitor report read.

"Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates."

The IMF proposed that economies with lower rates of progress in personal income taxes could potentially raise their top marginal tax rates without hindering the nation's economic growth, putting its position in stark contrast to that of the White House's new tax proposals that focussed heavily on tax breaks for corporations and the rich.

In the report, the IMF said the overall decline in global inequality since the late 1980's as a result of globalisation and technological progress had buried several socioeconomic issues deep within certain countries psyches, evidenced by voters sense of alienation over globalisation and stagnating wages leading to events such as Brexit, the election of Donald Trump and the rise of nationalism in both France and Germany.

Over the same 30 year period, the IMF said 53% of countries had seen an increase in income equality.

"It is important to emphasize that inequality has increased in the largest countries in the world: China, India and the United States," said the director of the IMF's fiscal affairs department, Vitor Gaspar.

The IMF's statement that tax theory implied that "significantly higher" tax rates on citizens with higher incomes would not hinder economic growth came shortly after Labour leader Jeremy Corbyn proposed a new 45% tax bracket that would encompass those who bring home more than £80,000 and a 50% rate for people earning in excess of £123,000.

Gaspar pointed out that the average top income tax rate for the wealthy in member countries of the Organisation for Economic Cooperation and Development had fallen to 35% in 2015 from 62% in 1981 around the time both the Thatcher and Reagan administrations began to drop top line income taxes in their respective nations - during her tenure Margaret Thatcher orchestrated a drop in the top tax band of 43 points, while the practice of Reaganomics lowered it 42 points, raising the deficit and lowering GDP along the way.

The IMF pointed to extremely progressive tax systems, like the rates of "nearly 100 percent in Sweden or the United Kingdom in the 1970s," as a possible ally to curtailing further inequality, as it ranked the UK's current tax system as fairly middle of the road when it came to the tax systems of other advanced economies.