The International Monetary Fund (IMF) says that some wealthy countries could raise top rates of income tax without harming economic performance. A new report from the IMF looks at what governments can do about inequality.
The IMF argues that government spending and tax policies play an important role in determining the level of inequality, which has increased in developed economies in recent decades.
In those countries, what it calls “redistributive fiscal policies” – tax and spending can make substantial differences reducing on average inequality by a third. Spending policies include payments to people on lower incomes and the provision of services such as health and education.
The report argues that tax on personal income is less progressive than the tax rates suggest, as wealthy individuals have more resources to plan their tax affairs and more incentive to do it.
The IMF queries whether the decline in higher tax rates is due to concerns about economic growth. It is a concern that higher tax rates might sap the incentive to work and invest.
Some degree of inequality is inevitable in a market economy, as result of differences in talent, effort and luck. Excessive disparities in income “can erode social cohesion, lead to political polarisation and lower economic growth”.
Trends over recent decades have been varied. Income inequality has decreased taking the entire global population, owing to strong income growth in large emerging economies such as China and India. Within wealthy nations, general patterns have been widening disparities in the period the examined, 30 years up to 2015.
The analysis suggests that tax and spending policies do make a substantial difference. Income from capital needs to be taxed adequately to maintain the progressive nature of the tax system, because it is distributed more unequally than income from work.
In terms of how much inequality is reduced by taxes and spending, the UK is close to average for the developed economies.