Higher taxes cut inequality without damaging the wealthy, says IMF

The International Monetary Fund (IMF) is calling for developed countries to consider introducing higher income tax rates for the wealthiest, arguing the evidence suggests this would help reduce inequality without having an adverse impact on growth, contrary to received thought

In its fall 2017 half-yearly fiscal monitor, the IMF states that at the upper part of the income (and wealth) distribution, taxation is the main tool for redistribution, but points out that tax progressivity has declined over the past three decades.

The report says: ‘This decline is consistent with the drop in top personal income tax rates in OECD countries from an average of 62% in 1981 to 35% in 2015.

‘Our empirical results suggest that it is possible to increase the degree of tax progressivity while preserving growth, at least for levels of progressivity that are not excessive.’

The IMF goes on to argue that advanced economies with relatively low levels of progressivity in their personal income tax (PIT) may therefore have scope for raising the top marginal tax rates without hampering economic growth.

It states: ‘Different types of wealth taxes can also be considered. Emerging markets and low income developing countries should focus on gradually expanding the coverage of the PIT and raising indirect taxes—including excise taxes on luxury goods and consumption items that generate negative externalities, such as fossil-fuel-based energy, alcohol, and tobacco— to generate funding for progressive spending.’

In response, John McDonnell, Labour’s shadow chancellor, said: ‘The IMF support the argument we made in the general election for a fairer tax system. There is no evidence to support those who scaremonger about the effects of making the rich pay fairer tax.’

IMF Fiscal Monitor: Tackling Inequality, October 2017 is here.

Report by Pat Sweet

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