IMF Warns Income Disparities Can Hurt Economies

Thursday, 13 Mar 2014 12:50 PM

 

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The International Monetary Fund warned Thursday that wide income inequality can slow economic growth and is proposing ways to reduce it.

Its recommendations include: Raising property taxes. Taxing the rich more than others. Raising the eligibility age for government retirement programs.

Such proposals have typically encountered stiff opposition from policymakers. IMF officials say it is up to individual countries to decide whether and how to try to reduce income disparities. But if they do, its report being released Thursday highlights ways it says governments can use tax and spending policies to reduce inequality without inhibiting growth.

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The proposals are the latest evidence of the IMF's growing concern about income inequality. It's an unusual focus for a global lending organization best-known for providing loans paired with strict budget cuts.

Thursday's report puts the weight of the IMF behind the notion that large wealth gaps can inhibit growth, a move welcomed by advocacy groups for emerging economies.

Similarly, a survey by The Associated Press late last year found that a majority of economists think income inequality in the United States is weakening its economy. Middle-income consumers are more likely to spend extra income than wealthier households are. As a result, stagnant middle-class income can depress consumer spending and overall growth.

"The IMF is coming kind of late to the party in terms of worrying about inequality and what can be done about it," said Nancy Birdsall, president of the Center for Global Development. "But they are a big player, so we're glad they came to the party."

Last month, an IMF research paper concluded that countries with steep income inequality are more likely to have briefer and weaker periods of economic growth. It also argued that efforts to redistribute income don't necessarily hinder economic expansion.

That runs counter to traditional thinking, which generally assumes a trade-off between economic growth and efforts to reduce inequality. Under this view, a higher tax rate on the wealthy or higher spending on social welfare, while it may reduce income inequality, would likely depress growth.

Christine Lagarde, the IMF's managing director, said in a speech last month that income inequality "can have pernicious effects" and that "careful design of tax and spending policies can help reduce inequality."

Senior IMF officials said on a conference call with reporters that the research resulting in Thursday's paper stemmed from rising concern among its 188 member nations about income inequality. The issue is the subject of growing public concern in many countries, the paper says. The IMF provides economic advice to its members as well as loans for deeply indebted countries.

Birdsall said the report could affect the advice the IMF gives to countries, mostly in the developing world, that rely on it for financial assistance.

For example, it has recommended in the past that governments adopt sales taxes because they can be easier to collect than income taxes, Birdsall said. But Thursday's paper argues that sales taxes can worsen inequality, while income taxes can be used to reduce it.

The report recommends that advanced economies reduce tax breaks that are more likely to benefit the wealthy. It specifically cited the mortgage-interest tax deduction in the United States.

It also says countries should make it easier for poorer citizens to afford higher education and access health care. More education would help low-income people to earn more and move up the income scale, the paper says.

Nicolas Mombrial, a spokesman for Oxfam, an international aid agency, said, "We hope this signals a long term change in IMF policy advice to countries, to invest in health and education and more progressive fiscal policies."

The IMF paper says progressive income taxes — under which the wealthier pay a higher proportion of their incomes — are better at redistributing income than flat taxes or consumption taxes. Twenty-seven countries have adopted flat income taxes since the mid-1990s, the IMF says, mostly in Eastern Europe. They include Russia, Ukraine, the Czech Republic, Hungary and Iceland.

Many advanced economies, meanwhile, could raise more revenue from property taxes, the paper suggests. Such taxes on homes and land are unpopular because they are hard to avoid, but can lower inequality because they fall heaviest on the wealthiest people.

Previous IMF research has found that Germany, Finland, and Switzerland rely much less on property taxes than the United States, United Kingdom and France. Middle-income nations such as Mexico and Turkey also receive less revenue from property taxes.

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© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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