+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

IMF: Taxing The Rich Is Good For The Economy

Feb 27, 2014, 10:34 IST

REUTERS/Darren StaplesA man walks from his Ferrari as a carriage passes during the fourth day of the Royal Ascot horse racing festival at Ascot, southern England, June 21, 2013.

The International Monetary Fund came out Wednesday in support of the fight against income inequality, with Fund economists saying income redistribution efforts can strengthen economic growth.

Advertisement

Plunging into a debate over the gap between rich and poor that is fueling political battles from the United States to Brazil to Thailand, economists from the Fund said there is already general agreement that inequality can fuel economic and political instability.

But do policies to redistribute income help or hurt growth? asked economists Jonathan Ostry, Andrew Berg and Charalambos Tsangarides.

The answer, they said, is a net gain, even if there is an initial cost to an economy from taxes and transfers which aim to close an income gap.

"While considerable controversy surrounds these issues, we should not jump to the conclusion that the treatment for inequality may be worse for growth than the disease itself," they said in a research paper, "Redistribution, Inequality, and Growth", and an accompanying blog comment.

Advertisement

"Equality-enhancing interventions could actually help growth."

The trio cited the benefits of taxes on activities of the wealthy that could hurt an economy, like excessive financial speculation, and payments to the poor to support their children going to school.

Much of the thinking has been that, even if a large wealth gap is bad, that the cures of taxes and wealth transfers to correct the problem usually hamper growth.

"Many argue that redistribution undermines growth, and even that efforts to redistribute to address high inequality are the source of the correlation between inequality and low growth," they said.

"If this is right, then taxes and transfers may be precisely the wrong remedy: a cure that may be worse than the disease itself."

Advertisement

But the authors said that experience across a number of countries has provided "remarkably little evidence" for that conclusion.

Indeed, they said, "faster and more durable growth seems to have followed the associated reduction in inequality."

"The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth."

The authors are cautious to avoid saying the effects of redistribution are positive in every case or situation, and note that extreme efforts can have a bad outcome.

But overall, they argue that redistribution programs should be not be excluded from policy out of fear they would hold back an economy.

Advertisement

"It would still be a mistake to focus on growth and let inequality take care of itself, if only because the resulting growth may be low and unsustainable.

"Inequality and unsustainable growth may be two sides of the same coin."

Copyright (2014) AFP. All rights reserved.

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article