Will increasing the tax burden on the rich hurt growth? Unlikely, says the IMF

A standard refrain among those with conservative proclivities is to argue that the rich are ‘wealth and job creators’. Hence, they deserve to be treated generously, including ensuring that they are not taxed at onerous rates. Otherwise, the rich will vote with their feet and relocate to low tax environments. Protect through preferential treatment, seems to be the sentiment, the proverbial goose that lays the golden egg.

Governments across the world have been influenced by such a view. Marginal tax rates on high income groups have fallen substantially across the OECD as has corporate tax rates. During the recent UK elections, the British Labour Party proposed a 50 per cent tax rate on top income earners. Predictably, the Tory government and its enablers protested that the economy would face ruin because of a ‘tax bombshell’.

The view that the rich should be treated with care and generosity, especially through the tax system, in order to nourish their role as wealth and job creators has now been challenged by the IMF- an institution that its critics believe is a bastion of neoliberalism and fiscal conservatism. In a report that has attracted media attention, the IMF’s Fiscal Monitor (October 2017) draws on optimal tax theory to show that progressive income taxes (PIT) have a major role to play in ‘tackling inequality’ without hurting growth. A marginal tax rate on high income groups of 44 per cent would have no impact on growth while furthering the goal of redistribution. The current norm in the OECD is 35 per cent. So, the British Labour Party was not really being outlandish in what it proposed.

Of course, the IMF is a diverse institution that can speak with many voices. At the global level, though not necessarily at the country and operational level, it is making proclamations that appear to be a lot more nuanced than they have been in the past. Indeed, it even engaged in a robust critique of neoliberalism arguing that as an intellectual brand it seems to have been ‘oversold’ in some respects. The IMF’s messages on dealing with inequality through the tax system are also in line with the views of entrepreneurs and academics who seek to dismantle the myth that the rich are really job creators who deserve special dispensation from governments across the world.