Note the implication: health and education spending as well as progressive taxation deliver reduced inequality. And these are the themes the IMF then builds on, suggesting that there are now three ways in which inequality might be tackled.
The first is by more progressive taxation:
Personal income tax progressivity has declined steeply in the 1980s and 1990s, and has remained broadly stable since then. The average top income tax rate for OECD member countries fell from 62 percent in 1981 to 35 percent in 2015. In addition, tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief. Importantly, we find that some advanced economies can increase progressivity without hampering growth, as long as progressivity is not excessive.
Let’s not beat about the bush: this is the IMF (of all organisations) making clear that we now have insufficiently progressive taxation; that we could have more of it; that this would be beneficial in most cases; and that this will not have negative growth consequences (as is almost glaringly obvious to anyone who has thought in any way appropriately about this issue, but which is welcome, nonetheless).
What they actually say is:
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
Which then leaves open the question of just how progressive are we?
Page 7 of the report tells us, we’re around and about average, both in the Gini points that the total tax and spend system reduces inequality by and also in the portion of that which is due to taxation rather than spending. We’ve not got low rates nor progressivity, the potential to raise doesn’t apply to us.
Which is what they all said a couple of years back too, that you can lower the Gini by 12-14 points or so without killing the goose but not much more than that. Which is a little less than what we currently do.
This is also fun, isn’t it?
Economic theory suggests that taxing capital income
can lower efficiency. Specifically, a comprehensive
income tax that includes capital income effectively
taxes future consumption at a higher rate than current
consumption, thereby discouraging saving and
thus investment and economic growth. Moreover,
it means that an individual who earns most of his
or her income early in life pays more in tax than
another who earns the same lifetime income, but
spread out over time. Based on these arguments,
some economists contend that only consumption
or—equivalently—labor income should be taxed.27
Although this is a powerful argument, there are
negative equity consequences of taxing only consumption,
given that the richest individuals may
consume only a fraction of their wealth during
their lifetime. A compromise between solely taxing
consumption and taxing income comprehensively
can be achieved by creating tax-favored vehicles,
such as pension funds, that can allow individuals to
save efficiently for their life cycle needs, while still
taxing capital incomes of individuals with much
Those pension reliefs should stay then, eh?