The International Monetary Fund has controversially backed the case for higher taxes in advanced economies, claiming that a number of them could raise taxes on high earners, wealth and property without damaging growth prospects.
In an analysis that will infuriate architects of President Donald Trump’s tax cutting plan, the world’s lender of last resort said that while some inequality is inevitable in a market-based economic system, excessive inequality could erode social cohesion, lead to political polarisation and ultimately lower economic growth.
In its bi-annual “Fiscal Monitor”, the IMF suggested that advanced economies with relatively low levels of progressivity in their personal income tax may have scope for raising the top marginal tax rates without hampering economic growth.
It noted, however, that extremely progressive tax systems, such as the tax rates of “nearly 100 percent in Sweden or the United Kingdom in the 1970s”, could possibly curtail growth. The IMF pointed instead to levels of taxation seen in OECD countries from 1981 onward 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 also said that taxes on land and property were “both equitable and efficient, and remain underused”.
The analysis did not single out the UK, or any other country, by name as best suited for higher taxes, but asserted that there was was scope for “significantly higher marginal tax rates on top income earners than current rates”.
Christine Lagarde, managing director of the IMF, said that “some advanced economies could raise their top tax rates without slowing growth”.