Jessica Fino 12 Oct 2017 02:43pm

Higher taxes would not hurt growth, IMF says

“Significantly higher” taxes for top income earners could reduce inequality without having an impact in economic growth, the International Monetary Fund (IMF) has suggested

In its latest fiscal monitor, the Washington-based organisation argued a tax hike among the richest taxpayers would actually close inequality within advanced economies.

The IMF said these economies might have scope for raising the top marginal tax rates without hampering economic growth.

“Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates,” the report said.

It argued that this would not lead to a decline in countries’ growth, “at least for levels of progressivity that are not excessive”.

The IMF pointed out that while strong income growth in China and India had helped lower global inequality, income inequality had increased in most advanced economies.

These findings contradict president Donald Trump’s tax policy announced this week in the US, which saw him promise to cut taxes to “hard-working Americans”.

Trump proposed doubling the standard deduction so that more income is taxed at 0% and consolidating the seven existing income tax brackets for taxable income to only three brackets (12%, 25%, and 35%).

Back in the UK, shadow chancellor John McDonnell said the IMF’s findings supported the arguments his party made during the General Election.

“There is no evidence to support those who scaremonger about the effects of making the rich pay fairer taxes. Not only have the Tories slashed the top rate of tax, they still plan billions in tax giveaways to the super rich and big corporations over this parliament,” McDonnell said.

“The chancellor should listen to Labour’s calls for fairer taxes and increased investment to build an economy for the many not the few.”

Vitor Gaspar, director of the IMF’s fiscal affairs department, and deputy director Mercedes Garcia-Escribano wrote in a blog that fiscal policy offsets a third of income inequality before taxes and transfers.

“Tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief,” they argued.

TaxPayers Alliance research director Alex Wild said it was unsurprising to see the IMF calling for higher taxes, “Firstly because their employees don't pay tax, and secondly because they are almost invariably wrong.

“The government is already taking the tax burden to its highest level since 1970,” he said.

On the other side of the spectrum, Stefan Stern, director at the High Pay Centre, said it was, “Absolutely right to question or investigate some of the conventional wisdom about taxation and its effects.

“Wealth really has not ‘trickled down’ successfully within nation states where higher levels of income tax for the very rich have been reduced…It is time to look harder at higher rates of income tax for the very rich."

Meanwhile, the mid-tier firm BDO said on Thursday the business climate in the UK remained fragile due to low productivity and concerns around consumer spending and Brexit uncertainty.

BDO said the UK business clime was expected to improve entering 2018, as its industry watch gouge had risen from -24 to -4, in a scale of -50 to 50.

This is an improvement from last quarter, particularly in the financial services sector, with climate improving 11 points from -20 to -9. Business services was the only sector that moved to positive territory, from -15 to 7 points.