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IMF: Tax policy fuels inequality

Hardy GraupnerMarch 13, 2014

The International Monetary Fund has has called on policymakers to rethink tax systems as a way to tackle growing inequality between rich and poor. It says tax policy enactment often fails to reduce income disparities.

Begging woman in Greece
Image: Louisa Gouliamaki/AFP/Getty Images

A staff paper issued by the International Monetary Fund Thursday looked at efficient ways of redistributing income to whittle down growing inequality in societies across the globe.

The survey's authors argued that the design of underlying policies had a crucial impact on the efficiency of the individual measures taken and the resulting prospects for economic growth.

Thursday's report adds weight to the notion that large wealth gaps can inhibit growth, a move welcomed by advocacy groups for emerging economies.

It echoes remarks made last month by Christine Lagarde, the IMF's managing director, that income inequality "can have pernicious effects" and that "careful design of tax and spending policies can help reduce inequality."

Unpopular measures

The IMF recommendations, which typically prompt objections among policymakers, include raising property taxes, taxing the rich more than others and raising the eligibility age for government retirement programs.

"Redistribution, if poorly designed, or pushed too far, can be distortive", IMF First Deputy Managing Director David Lipton said: "But some redistributive fiscal policies can in fact help improve efficiency and support growth."

The study noted that in about half of a sample of 27 advanced and emerging European nations that undertook fiscal adjustment between 2007 and 2012 inequality actually increased.

Long-term effects in focus

A closer look at the measures taken revealed an excessive focus on consumption tax rather than on taxes on income.

Global Risk Report - the threat of inequality

It also found that a larger share of social spending in developing economies benefited higher-income groups, with the poorest 40 percent of the population receiving less than 20 percent of the benefits of social protection expenditures.

The IMF advised policy makers to avoid evaluating taxes and spending separately.

It added that an increase in value-added tax revenues could in net terms be helpful, if used to finance higher spending in primary education.

It also urged nations with a flat income tax rate to consider the social benefits of introducing tax progression at the top and relieving low-wage earners from both income tax and social contributions.

Late, but welcome

"The IMF is coming kind of late to the party in terms of worrying about inequality and what can be done about it," said Nancy Birdsall, president of the Center for Global Development.

"But they are a big player, so we're glad they came to the party," Birdsall said.

A spokesman for the international aid organization Oxfam, Nicolas Mombrial, said, "We hope this signals a long term change in IMF policy advice to countries, to invest in health and education and more progressive fiscal policies."