THE International Monetary Fund has provoked a backlash from the US administration after it suggested that major economies should raise taxes on high earners.
The global lender of last resort said many rich countries could take advantage of benign economic conditions to raise taxes in order to reduce deficits and tackle inequality. Doing so, the fund said, would not damage growth prospects.
This analysis comes just two weeks after president Donald Trump’s major tax reforms were revealed. These included a reduction of 4.6pc in the top level of income tax to 35pc. The fund’s analysis has provoked outcry from Mick Mulvaney, the Republican director of the US Office of Management and Budget.
The IMF was “heavily invested in [tax reforms] not working out,” he told the Financial Times.
Vitor Gaspar, head of fiscal affairs at the IMF, said there was little empirical evidence to suggest that additional revenue could be generated by lowering tax rates, despite that “being a conceptual possibility”.
The pro-taxation stance in the fund’s bi-annual Fiscal Monitor was well received by John McDonnell, the shadow chancellor, however. “The IMF supports the argument we made in the general election for a fairer tax system,” he said. He added that there was no evidence to support “those who scaremonger about the effects of making the rich pay fairer tax”.
Alex Wild, research director of the TaxPayers’ Alliance, said that the Government was already taking the tax burden to its highest level since 1970, and condemned suggestions of a rise in rates.
“It’s hardly surprising to see the IMF calling for higher taxes, firstly because their employees don’t pay tax, and secondly because they are almost invariably wrong,” he said.
“Given the fund’s recent catalogue of spectacularly poor judgment calls on the euro, Brexit, Greece and UK fiscal policy, it’s a wonder anyone pays attention to their policy prescriptions,” he added.
The IMF said it did not want to see a repeat of tax rates at nearly 100pc as in Sweden or the United Kingdom in the Seventies, which could possibly curtail growth. Instead, it pointed to levels of taxation seen in OECD countries from 1981 onwards for guidance as they showed “no clear evidence” of harm.
The IMF also urged governments to consider different types of wealth taxes and to increase capital gains taxes. It said that taxes on land and property were “both equitable and efficient, and remain under-used”.
The analysis did not single out any particular country as requiring higher taxes. However, Christine Lagarde, managing director of the IMF, said that “some advanced economies could raise their top tax rates without slowing growth”. The IMF ranks the UK about middle of the pack of advanced economies in terms of how progressive its tax system is. Recent UK data have sug- gested that income inequality has been declining since the financial crisis.
Speaking in response to a second report on global financial stability, Tobias Adrian, director of the monetary and capital markets department at the IMF, warned that despite a “strengthening core”, increasing vulnerabilities were “building under the surface” and could derail the global economic recovery.
Credit booms were singled out as one area of increasing concern. “Elevated risks” posed to Chinese financial stability due to rocketing debt were particularly troubling, Mr Adrian said.
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