Written By: - Date published: 12:30 pm, October 14th, 2017 - 104 comments
Categories: bill english, capital gains, don brash, Economy, gst, john key, labour, tax, winston peters - Tags: gareth morgan, IMF, income inequality, oecd
The International Monetary Fund (IMF) says it now favours higher taxes on the rich and has demolished the myth this might adversely affect economic growth.
The authoritative Washington-based think tank in its influential half-yearly monitor also argued for taxes on capital, suggesting a wealth and/or land taxes should be considered, something that will make Gareth Morgan as happy as if the Opportunities Party was in election talks, or even in parliament.
Scaremongers on the Right regularly trot out the high taxes will damage growth fable to scare the electorate and other parties against advocating a more progressive tax regime. Labour has bought into this myth which is why it was too timid to go to the electorate with a firm policy of higher taxes for the 1 percent.
Don Brash, John Key, Bill English and many bank economists have long argued that hitting the rich is bad for economic growth, but the IMF notes there should be “significantly higher” taxes on those with higher incomes than currently prevail.
“Advanced economies with relatively low levels of progressivity in their personal income tax (PIT) may therefore have scope for raising the top marginal tax rates without hampering economic growth,” it added.
“Empirical analysis suggest that there is no systemic adverse trade-offs between increasing growth and decreasing equality,” the IMF noted.
The IMF argument is backed by the OECD, another respected body that could hardly be described as radical or leftist, which in a 2014 paper, Trends in Inequality and its impact on Economic Growth, studied the economic performance of its advanced nation members over a long period and found more equal societies have better economic performance.
The thrust of the IMF paper is a warning to governments about excessive inequality, which it says can erode social cohesion, lead to political polarisation and ultimately lower economic growth.
The paper says it is difficult to rationalise the decline of progressivity in OECD countries since the 1980s.
New Zealand, which once prided itself on being one of the most equal socially cohesive societies in the world, has had one of the steepest rises in inequality in a world of rising inequality.
Since the 1980s, New Zealand’s inequality, has moved closer to unequal countries like the United States. New Zealand’s rate of increase in inequality has been exceeded only by Finland and Sweden.
One measure of inequality in New Zealand compares the incomes of those near the top (the 80th percentile) with those near the bottom (the 20th percentile). In 1980, someone near the top earned 2.4 times what someone near the bottom did, after factoring in housing costs. Now, they earn three times more.
The IMF paper, also argued that different types of wealth taxes should be considered as part of a nation’s armoury to fight excessive inequality.
It notes capital income is even more unequally distributed than labour income and it is rising, and it is often taxed at a lower rate than labour (for New Zealand make that zero).
It says there needs to be adequate tax of capital to protect the progressivity of the tax system, as the wealthy, due to their superior resources, have far more ability to reclassify their income as capital (ie tax dodge).
“Many countries (none named) should emphasise reducing opportunities for tax evasion and avoidances.”
“Taxes on real estate or land are both equitable and efficient and remain underused,” the paper says.
In countries, where there is a low capital gains tax, or in New Zealand’s case, none, the degree to which the fairness of the tax system has diminished since the 1980s is even more exaggerated, the IMF authors state.
“In reality, tax systems may be even less progressive than suggested… because wealthy individuals often have more access to tax relief and more opportunities to avoid taxes.”
“The wealthier have more resources to dedicate to tax planning, as well as incentives to engage in such activities.”
The authors cite another paper by Alstadsaeter Johannesen and Zucman who provided empirical evidence “that tax evasion is particularly high at the upper end of the income distribution” – ie the lack of a capital gains tax gives the 1 percent even more opportunity to rort and cheat.
In what would be even more music to the ears of Mr Morgan, the IMF paper explores the merits of a universal basic income (UBI) as a means of reducing inequality. While it could significantly reduce poverty and reduce income uncertainty resulting from the affects of automation (robots), it is not suitable for countries with a relatively good safety net welfare system.
In such countries “a UBI would result in a very large reduction in progressivity and losses in the size of benefits for many poor households and could even lead to higher poverty”.
The IMF paper taxes a sideswipe at regressive value added taxes, such as GST, which it says are good for increasing revenue but “not to enhance equity”.
The authors says that health and education play a vital role in reducing income inequality over the medium term, addressing the persistence of poverty across generations, enhancing social mobility and ultimately promoting sustained inclusive growth.
They say that in some advanced countries the life expectancy gap between those with tertiary education and those without has even widened in recent years as has the infant mortality rate between the top and bottom socioeconomic quintiles.
The authors, however, are sceptical about the prospect of countries redressing the inequities identified. They say it will be difficult to politically implement a return to a more progressive and fairer tax system, such as prevailed before the 1980s, “because better-off individuals tend to have more influence”, via lobbying, access to the media and political engagement.
It is especially difficult because, unlike in the UK, the Labour Party does not even have a policy of restoring progressivity to the tax system and it might be even more difficult if Winston Peters and New Zealand decide that enough is not enough.
Simon Louisson formerly worked for The Wall Street Journal, NZPA, Reuters, The Jerusalem Post and was a political and media adviser to the Green Party around the 2014 election