Raising income tax on the wealthy will help close the growing gap between rich and poor and can be done without harming growth, the head of the International Monetary Fund has said.
Kristalina Georgieva, the IMF’s managing director, said higher marginal tax rates for the better off were needed as part of a policy rethink to tackle inequality.
In a sign of how the IMF has moved away from the tax-cutting approach that once formed a central part of its policy advice, Georgieva said there needed to be a different approach to tackling what had become “one of the most complex and vexing challenges in the global economy”.
The IMF chief, writing in a blog, said: “Inequality of opportunity. Inequality across generations. Inequality between women and men. And, of course, inequality of income and wealth. They are all present in our societies and – unfortunately – in many countries they are growing.”
What is the IMF?
The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.
Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.
The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.
The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.
Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members' relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold.
In the 1990s, the IMF was at the heart of the Washington consensus – a free-market approach to running economies that included the belief that tax cuts for the better off would have trickle down benefits through greater innovation and higher growth. The IMF functions as the global lender of last resort, bailing out countries in financial difficulty and issuing policy advice alongside its interventions.
But the IMF has shifted it stance amid evidence of weak growth, a concentration of wealth among the top 0.1% of the population, and a falling share of national output going to workers. In recent years, it has produced research disputing the Washington consensus belief that countries could have lower inequality or faster growth but not both.
The world’s 26 richest billionaires – including Amazon founder Jeff Bezos and Facebook’s Mark Zuckerberg – own as many assets as the 3.8 billion people who make up the poorest half of the planet’s population, according to Oxfam. In a report last year, the charity said a global wealth tax on the 1% would raise an estimated $418bn (£325bn) a year – enough to educate every child not in school and provide healthcare that would prevent 3 million deaths.
“Tackling inequality requires a rethink,” Georgieva said, adding: “Despite the political difficulty of implementing reforms the payoffs for growth and productivity are worth the effort.
“Progressive taxation is a key component of effective fiscal policy. At the top of the income distribution, our research shows that marginal tax rates can be raised without sacrificing economic growth.”
The IMF managing director, who succeeded Christine Lagarde last year, said higher taxes on the better off, the use of digital tools to boost tax collection, and reducing corruption would help fund government spending to expand opportunities for those “communities and individuals that have been falling behind.”
Tax and spending policies should also have a gender dimension, Georgieva said. “While many countries recognise the need for gender equality and women’s empowerment, governments can use gender budgeting to structure spending and taxation in ways to advance gender equality even further – increasing women’s participation in the workforce and, in turn, boosting growth and stability.”
The IMF has often been criticised by development campaigners for insisting on public spending cuts as part of its rescue packages for countries in financial distress. Georgieva said the IMF recognised that social spending policies are increasingly relevant in tackling inequality.
“When done right they can play a fundamental role to mitigate income inequality and its detrimental effects on inequality of opportunity and social cohesion.
“Education, for example, prepares young people to become productive adults who contribute to society. Healthcare saves lives and can also improve the quality of life. Pension programmes can allow the elderly to preserve their dignity in old age.”
She added that many less well-off countries needed to scale up social spending if they were to have a chance of meeting the UN’s 2030 17 sustainable development goals (SDGs), which include reducing inequality.
“In key areas such as health, education, and priority infrastructure, we estimate that emerging market economies will require additional spending every year – reaching about 4 percentage points of GDP in 2030.”
Georgieva said the IMF could not tackle inequality on its own.
“We envision this as a partnership of international organisations, academics, country authorities, civil society and the private sector working together to enhance social spending policies and lay the groundwork for achieving the SDGs.”
