The IMF's standard policy prescription for dealing with fiscal imbalances in both developed and developing countries is well-known: reduce public expenditure, expand the base of the value-added tax (VAT), curb evasion. Critics have for a long time argued that this approach has a built-in unequalising bias; spending cuts have a more harmful effect on the poor than on the rich; VAT, as a consumption tax, is regressive; and multinational corporations and their wealthy owners are much more able to frustrate efforts at curbing evasion than the ordinary tax payer.
Such criticisms have historically fallen on deaf ears; until now, that is; or so it would seem.
In a previous blog I commented on a June 2013 IMF Working Paper on the distributional effects of fiscal consolidation which finds that fiscal consolidation through reductions of spending Increases inequality. This was seen as a move in the direction of unorthodoxy, albeit a very cautious one and unofficial to boot.(1)
But now an official IMF report seems to take the move further.(2) To be sure, the basic message is still orthodox:
"the scope to raise more revenue is limited in many advanced economies and, where tax ratios are already high, the bulk of adjustment will have to fall on spending … Broadening the base of the value-added tax ranks high in terms of economic efficiency … and can in most cases easily be combined with adequate protection for the poor. In emerging market economies and low-income countries, where the potential for raising revenue is often substantial, improving compliance remains a central challenge."(3)There is however a frank recognition of the fact that tax systems around the world have become steadily regressive since the 1980s: they rely more on indirect taxes, and within direct taxes the progressivity of the personal income tax has declined, reflecting steep cuts in top marginal tax rates. Therefore, the report says,
"scope seems to exist in many advanced economies to raise more revenue from the top of the income distribution (and in some cases meet a nontrivial share of adjustment needs), if so desired. And there is a strong case in most countries, advanced or developing, for raising substantially more from property taxes … taxes on wealth also offer significant revenue potential at relatively low efficiency costs."(4)The report goes even further in connection with the need to stop tax evasion and avoidance by multinational corporations which employ devices like base erosion and profit shifting to reduce their tax liabilities. It mentions cases in which the revenue lost to developing countries through tax planning by multinationals is as much as 20 per cent of all tax revenue. This is made possible by the fact that "the international tax framework is broken" and in need of a fundamental overhaul. The conclusion of this analysis: "The chance to review international tax architecture seems to come about once a century; the fundamental issues should not be ducked."
Fighting talk indeed, and certainly very welcome.
Carlos Fortin is an IDS Research Associate currently working on the relationship between the emerging international trade regime and human rights.
1. IMF Working Papers carry a disclaimer that reads: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy".
2. International Monetary Fund, Fiscal Monitor. Taxing Times, World Economic and Financial Surveys, Washington D.C., October 2013
3. Ibid., p. vii
4. Ibid., p. viii