Tax Policy Needed for Equality and Economic Growth

March 14, 2014 International Tax Cooperation

InequalityWASHINGTON D.C. – Governments could foster strong economic growth by ensuring that tax policies adequately aimed at both redistributing wealth and at reducing inequality.

Efficient and well planned tax policies are a key to reducing income inequality, and, subsequently, boosting economic growth, according to a new paper released by the International Monetary Fund on March 13th.

The release of the new paper follows on the heels of recent research conduced by the IMF showing that income inequality may hinder economic growth, and that implementing tax policies aimed at distributing wealth may improve the economic performance.

Addressing the question of why the initial planning and implementation of distributive taxpolicies is important, the IMF First Deputy Managing Director David Lipton said that “…redistribution, if poorly designed, or pushed too far, can be distortive,” while “…some redistributive fiscal policies can in fact help improve efficiency and support growth, such as those that enhance the human capital of low-income households.”

According to the new IMF paper, the key considerations when planning efficient redistributive tax policies are simultaneously evaluating taxation and government to determine whether they are adequately matched, ensuring that any implemented redistributive policies are aligned and complimentary to the overall economic policies already in place, taking into account any negative trade offs that a distributive policy might have, and ensuring that tax authorities have the administrative and processing capacity to facilitate and implement any new tax policies aimed at reducing inequality.

Photo by: Clare Bell