IMF calls for fiscal policies that tackle rising inequality

The IMF, along with the World Bank, will hold its semi-annual meeting of global policymakers later this week. PHOTO: AFP

WASHINGTON (REUTERS) - Countries around the world are suffering the consequences of rising internal inequality and should seriously consider redistributing wealth through tax policies and transfers, the International Monetary Fund said on Wednesday.

While overall global inequality has fallen in recent decades because of the economic rise of countries such as China and India, inequality within countries has risen sharply, especially in large countries like the United States and China. The Fund warned that excessive inequality could lower economic growth as well as polarize politics.

"Progressive taxation and transfers are key components of efficient fiscal redistribution," the Fund's Fiscal Monitor report said."Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates."

The IMF's message would appear to put it at odds with the Trump administration, whose new tax proposals rely heavily on cuts for companies and the wealthy.

The Fund noted that top personal income tax rates in Organisation for Economic Co-operation and Development rich nations had fallen to 35 per cent in 2015 from an average of 62 per cent in 1981. The IMF, along with the World Bank, will hold its semi-annual meeting of global policymakers later this week.

Its call to arms on promoting more inclusive growth comes at an uncertain time for many richer countries.

Britain's unexpected vote to leave the European Union, the election of Donald Trump as US president and the rise of economic nationalism in France and Germany have all been fueled by a growing number of voters alienated by globalization amid stagnating wages.

In its report, the IMF said the decline in overall global inequality over the past 30 years resulting from globalization and technological progress masked deep issues within countries, some caused by the same factors.

Over the same period, 53 per cent of countries have seen increased income inequality, the IMF said, and Latin America remains the most unequal in the world. The increase in inequality has been particularly acute in advanced economies but is spread across the globe.

"It is important to emphasize that inequality has increased in the largest countries in the world: China, India and the United States," said Vitor Gaspar, director of the IMF's Fiscal Affairs Department.

In many advanced economies such as the United States, the IMF said, rising wealth inequality has resulted from a rising concentration of wealth held by the richest 1 per cent of the population while economic growth has also mainly accrued to the top in low-income developing countries.

Join ST's Telegram channel and get the latest breaking news delivered to you.