The International Monetary Fund does not always give bad advice, but the bureaucrats (who get very generous tax-free salaries) are infamous for advising economically-troubled nations to raise tax rates. The latest example if from Latvia, which got itself in trouble by overspending during the boom years and taking on too much debt. The IMF, to its credit, has asked for long-overdue reductions in a bloated public sector, but Latvia’s economy also needs investment to get back on the right path – and that will be less likely if the nation’s politicians acquiesce to IMF demands to replace the flat tax with a system that discriminates against those that contribute more to growth. Bloomberg reports on how the IMF is using American tax dollars to push bad tax policy:
Tax-Free IMF Bureaucrats Urging Latvia to Repeal Flat Tax
July 31, 2009 by Dan Mitchell
Latvia and the International Monetary Fund reached a preliminary agreement yesterday paving the way for the first loan payment from the Washington-based fund since December. …The process of reaching an agreement has “been tumultuous,” Christensen said. The IMF and the Commission have made loan payments to the Baltic state conditional on budget standards being met, with the government pushing through pension, wage and other spending cuts to meet targets. The budget deficit may reach 10 percent of gross domestic product this year after the economy contracted 18 percent in the first quarter. …The country has cut spending by lowering pensions, state pay and maternity benefits, and raised value added tax since signing the agreement. It plans to introduce taxes on real estate, capital gains and earned interest income in next year’s budget, and may close some schools and hospitals. …“The idea of moving away from the flat tax to a progressive tax is very much one of the measures that we’re looking at,” Anne-Marie Gulde, senior advisor in the IMF’s European Department, said in a conference call. “It could help to increase revenues while putting more of the burden on higher- income groups.” The country’s parliament on June 16 passed 500 million lati ($1 billion) in spending cuts and revenue gains for this year, to unlock the loan from the European Commission.