Go ahead, tax the rich, they can afford it.
That’s the message from a new International Monetary Fund report that also finds inequality hampers long-run economic growth.
The analysis details just how much less progressive tax systems in wealthy countries like the United States have become over the years, as top marginal rates were cut sharply starting in the early 1980s. It identifies this trend as a significant contributor to the sharp rise in income inequality plaguing the United States and other rich nations.
“The downward trend over the past three decades is consistent with the decline in top income tax rates in advanced economies,” with the average for Organization for Economic Cooperation and Development (OECD) member countries falling from 62% in 1981 to 35% in 2015, the Fund said.
International Monetary Fund
“Many tax reforms since the 1990s have involved an increase in the exemption threshold together with a lower top personal income tax rate, causing a shift in the tax burden from very low and very high incomes toward the middle,” the report adds. “Tax systems may be even less progressive than suggested by these measures because wealthy individuals often have more access to tax relief and more opportunities to avoid taxes.”
The Fund’s shift away from a traditional emphasis on economic austerity and toward a more pro-poor policy stance marks a significant break with the past.
“Inclusive growth should be at the top of the agenda,” Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, told reporters during a press briefing in Washington, D.C. The IMF is holding its fall meeting in DC this weekend.
“Excessive inequality could erode social cohesion, lead to political polarization, and ultimately lower economic growth,” the report said.
Political realities
The IMF report was published weeks after the publication of President Trump’s tax plan, which appears to be taking the United States in the opposite direction.
His proposal would do a number of things, including slash the official (rather than effective) corporate tax rate to 20% from 35%; enact a 25% rate for “pass-through businesses” owned primarily by the rich; and repeal the estate tax, which affects only a tiny portion of the very wealthiest Americans.
That’s likely to aggravate already gaping US income inequality, now at levels not seen since before the Great Depression.
The Fund acknowledges an inequality-dampening tax code “could be difficult to implement politically, because better-off individuals tend to have more political influence, for example, through lobbying, access to media, and greater political engagement. Countries with historically more unequal income distributions often have political systems that are dominated by elites.”
Still, it emphasizes this should be a goal, not just for the sake of equity but also as an underpinning for sustainable long-run economic growth: “Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates.”
That’s unusually blunt IMF speak for — soak the rich, they can afford it.
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