The International Monetary Fund has said that some countries have the room to raise taxes, at little cost to economic efficiency, in order to reduce inequality. Everyone and their grandmother is now shouting that Britain can raise taxes in that manner.
This is not what the IMF said. It is what the papers are saying though:
The International Monetary Fund has called for higher income taxes on the rich to help to balance budgets and arrest the political threats posed by inequality in a sharp break with its prevailing orthodoxy.
Yet, in its latest fiscal monitor, that is precisely what the IMF has done. Not explicitly, of course. The report is careful not to say which countries should be thinking about raising the top rate of tax. Still less does it say that the right level should be the 50% proposed by Labour.
But that doesn’t really matter because what the IMF has done is provide some high-level support for Labour’s basic approach.
Labour seized on the report, calling for higher taxes on the rich, citing the IMF’s intervention as evidence of the need for a fairer tax system.
The pro-taxation stance in the fund’s bi-annual “Fiscal Monitor” was well received by Labour’s shadow chancellor, John McDonnell, however. “The IMF support the argument we made in the General Election for a fairer tax system,” he said.
He added that there was no evidence to support “those who scaremonger about the effects of making the rich pay fairer tax”.
The point being that this is not what the publication says, at all. What it does say is that, as we all know, there's a trade off between the damage done to economic efficiency by high taxation and the reduction of inequality by that tax and the subsequent spending. That's not exactly news. They then go on to explore where and when, in their opinion of course, the trade off in the loss of efficiency becomes too great for the value of the reduction in inequality.
About which they say this:
Empirical evidence suggests that it may be possible to increase progressivity without adversely affecting economic growth, for instance, by raising marginal tax rates at the top in countries with relatively low rates and progressivity.
That is, places with low tax rates and little progressivity in their tax systems can raise those rates and progressivity - but only those currently at the low end.
Which leaves us with the question, well, where is the UK? That's discussed on page 7. And the UK is slap bang in the middle of the countries studied. Both in how much inequality is reduced through the tax and spending system and also in how much of that is done by tax itself and alone. We're average, not low, that is. And thus the idea that we've the room to do more about inequality through higher taxes on the better off without damage to economic efficiency does not apply to us.
All of which usefully agrees with earlier findings from the same source. Our index for the inequality is the Gini and we can shift that by something in the range of 12 to 14 points without doing too much damage to that economic efficiency. More than that and we do indeed make us all poorer to no good end. The UK shifts the Gini by some 14 to 15 points by these calculations. We're doing about what we can without the damage becoming excessive already.
The IMF said some people can further reduce inequality through their tax and spend systems. Accurate observation tells us that they've not said this about the UK.