IMF Says Tax Cuts Impair Economic Growth

IMF

The International Monetary Fund (IMF) says that growing inequality in world economy, mostly resulting from improper taxation and tax cuts to the wealthier, can impair long-term economic growth.

The report issued on Thursday by the IMF with the title Fiscal Policy and Income Inequality claims that inequality and a lack of wealth redistribution within nations can severely hinder their economic performance in the long-run. The paper proposed, therefore, a series of possible reforms, such as introducing higher taxation for the rich, raising property taxes, ensuring more health care and education for poorer citizens and expanding the use of income taxes, rather than sales taxes, aimed at tackling the issue.

The proposals laid out in the reports is an unusual step for the global lender that is traditionally regarded as an organization promoting free market fundamentalism with policies such as financial liberalization, privatization and strict budget-cuts as conditions for conceding its loans to nations in need.

In the past the IMF has been criticized heavily for its obsession with limiting inflation and fiscal deficits, measures that are believed by many experts to be detrimental to the economy, especially in developing countries. Criticism has also come from the UN Department for Economic Affairs which in its report World Social Situation 2010 accused the IMF of ignoring the negative effects on employment creation caused by its tight monetary policies and its one-sided focus on fighting inflation.

The effects of economic inequality, like those mentioned in the IMF reports, were broadly exposed last year by the Nobel prize-winning economist Joseph Stiglitz in his book The price of inequality. The volume clearly explains that the inequality problem in the US, and other world economies, is the result of three decades of neoliberal economic policies imposed by greedy and powerful elites who “have learned how to suck out money from the rest in ways that the rest are hardly aware of.”

According to Prof. Stiglitz, these measures unleashed a wave of deregulation, privatization, attacks against the Unions and tax cuts for the rich that have in turn slashed incomes and increased inequality. The latter, says Stiglitz, has a retarding effect of productivity and can impair economic growth.

In line with Stiglitz’s conlusions, the IMF paper said that over the last three decades inequality has widened in most countries. The report noted, for instance, that in the United States the share of national income flowing to the richest 1 per cent of the population has grown from 8 per cent in 1980 to 19 per cent in 2012.

The increase in equality is also judged by the reports as the main cause for the wave of revolutionary events that have taken place in Egypt, Turkey, Venezuela and some Asian countries over the last two years, and for the rise of movements such as Occupy Wall Street.

On Thursday, the European Parliament voted a non-binding report for the creation of a European Monetary Fund, after it found that the austerity measures prescribed by the Troika – the IMF, the European Commission and the European Central Bank – to counter the European debt crisis were undemocratic and only deepened the crisis. According to Alejandro Cercas, author of a report on the Troika’s work, the three institutions destroyed in just a few months the social benefits achieved in Europe during decades of labor bargaining.

The Fiscal Policy and Income Inequality published on Thursday reflects growing concerns in the IMF and among global leaders about the increasing income inequality in world economies and gives credit to those experts who say since long time that tax cuts for the wealthy and financial deregulation impair global economic growth.

By Stefano Salustri

Sources:

International Monetary Fund

Huffington Post

Council of Foreign Relations

The Wall Street Journal

Yahoo News

EU Observer

Bretton Woods Project

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