IMF Fiscal Monitor: Tackling Inequality

IMF Fiscal Monitor: Tackling Inequality

Excessive inequality can have a severe impact on societies: social problems, political polarization and lost economic growth. Whether inequality is excessive depends on country-specific factors, which include the growth context in which inequality arises as well as societal preferences.

Fiscal policy can make the difference in tackling excessive inequality. The latest Fiscal Monitor, titled “Tackling Inequality”, by the IMF zeros in on three policy debates:
1. Progressive taxes – the rich pay more
2. Universal basic income – everyone gets a cash transfer of equal amounts
3. Improve access to health and education – this increases incomes and opportunities

Globally, inequality has significantly decreased over the past thirty years. At the national level the picture is a lot more mixed, though. Particularly advanced economies have seen a substantial increase, which has led to a growing public backlash against globalization, among other things. Not really surprising, considering that the world’s 8 richest men have accumulated the same amount of wealth as the 3.6 billion poorest people, which is half the world’s population.

This Fiscal Monitor focuses on how fiscal policy can be used to address high levels of inequality while minimizing possible reductions in efficiency and equity. It documents recent trends in income inequality and then examines the redistributive role of fiscal policies over recent decades, while underscoring the importance of appropriate design to minimize any efficiency costs. It then focuses on some controversial but key components of fiscal redistribution: tax rates at the top of the income distribution, the introduction of universal basic income, and public spending policies for achieving more equitable education and health outcomes.

“The analysis relies on the existing theoretical and empirical literature, IMF work on inequality and fiscal policy, country experiences, and new analytical work, including various static microsimulation analyses based on household survey data. Simulations using a dynamic general equilibrium model calibrated to country-specific data and behavioral parameters illustrate the potential impact of alternative budget-neutral tax and transfer measures on income inequality and economic growth.”

For years politicians and economists alike have been arguing that higher taxes for the top 1% earners, as tax theory suggest there should be, would be bad for growth. But this report just absolutely demolishes that argument. “Empirical results do not support this argument, at least for levels of progressivity that are not excessive.” The IMF added that “different types of wealth taxes might also be considered.”

Conclusion: Higher taxes for the rich will reduce inequality without hitting growth.
Now it seems that it’s time for the politicians to start translating this into policy as soon as possible.