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Posts Tagged ‘International Monetary Fund’

I’m not a big fan of the International Monetary Fund and I regularly criticize the international bureaucracy for its relentless advocacy in favor of higher taxes.

But that’s not what worries me most about the IMF.

To be sure, higher fiscal burdens undermine economic vitality, and I regularly warn that such policies will reduce an economy’s potential long-run growth rate.

That being said, tax increases generally don’t threaten macroeconomic stability.

If we’re looking at policies that can trigger short-run crises, I’m more concerned about the IMF’s bailout policies. For all intents and purposes, the IMF subsidizes “moral hazard” by reducing the perceived cost (to financial institutions) of lending money to dodgy governments and reducing the perceived costs (to governments) of incurring more debt.

Why not take more risk, after all, if you think the IMF will step in to socialize any losses? In other words, when the IMF engages in a few bailouts today, it increases the likelihood of more bailouts in the future.

That’s the bad news. The worse news is that the bureaucrats want a bigger figurative checkbook to enable even bigger future bailouts.

The good news is that the U.S. government can say no.

But will it? The U.K.-based Financial Times reported a few days ago that the United States might support an expansion of the IMF’s bailout capacity.

The Trump administration has left the door open for a US funding boost to the IMF, calling for a “careful evaluation” of the global lender’s finances to make sure it has enough money to rescue struggling economies. …The IMF — led by Christine Lagarde, a former French finance minister — is hoping to get its members to increase the fund’s permanent reserves… This year, the Trump administration has been among the most enthusiastic supporters of the IMF’s $57bn loan package to Argentina— its largest in history.

The next day, the FT augmented its coverage.

The IMF is set to embark on a major fundraising drive…the success of Ms Lagarde’s campaign is highly uncertain, with potentially profound consequences not only for the fund but for the global economy. …supporters of the fund say there are many possible scenarios in which it would be essential. If a recession and financial crisis were to hit in the coming years,central bankers may well struggle to find monetary remedies… a US Treasury spokesman left the door open to new possible contributions from America to the IMF. …Optimists point to a surprise decision by the Trump administration in April to support a $13bn boost to World Bank resources… there is still scepticism of the IMF among his top lieutenants at the Treasury department, including David Malpass, the undersecretary for international affairs. …Even if they were on board, economic and national security hawks at the White House who disdain multilateralism as a loss of sovereignty could be an additional obstacle, not to mention Republican lawmakers on Capitol Hill. The previous IMF quota increase, pushed by the Obama administration — which raised America’s permanent commitment to the fund to about $115bn — finally scraped through Congress in 2016, after a half-decade delay.

I was very saddened a couple of years ago when the GOP Congress agreed to expand the IMF’s bailout authority, especially since a similar effort was blocked in 2014 when Democrats still controlled the Senate.

The issue today is whether the Trump Administration will repeat that mistake.

Back in 2012, I stated that the IMF issue was a “minimum test” for Republicans. Well, the issues haven’t changed. Everything I wrote then still applies today.

I hope Trump does the right thing and rejects expanded bailout authority for the IMF for the sensible reason that it’s foolish to subsidize more borrowing by badly governed nations.

But I’m not picky. I’ll also be happy if Trump says no simply because he’s miffed that the IMF attacked him (accurately but unfairly) during the 2016 campaign and dissed his tax plan earlier this year.

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I’m happy to discuss theory when debating economic policy, but I mostly focus on real-world evidence.

That’s because my friends on the left always have a hard time answering my two-question challenge, which simply asks them to name one success story for big government.

They usually point to Sweden and Denmark, but get discouraged when I point out that those nations became rich when government was relatively small.

And I’m embarrassed to admit that some of my fellow economists once thought that communist nations grew faster than capitalist nations.

But let’s not digress. I raise this topic because there are many critics of capitalism who admit that free markets generate more wealth, but they assert that society would be better off if incomes were lower so long as rich people suffered more than poor people.

This strikes me as morally poisonous. But it also gives me an opportunity to cite a new study from the International Monetary Fund that allows us to further analyze this issue.

The IMF report starts by noting that globalization (free trade, liberalization, etc) has been good for global prosperity.

Over the course of the last decades the world economy has witnessed rapid integration. Most countries have opened up their economies and experienced an unprecedented rise in the flow of goods and capital across borders. This phenomenon – now widely known as economic globalization – was coincident with rising living standards in a large number of countries. Many developing countries have experienced episodes of strong economic growth and substantial poverty reduction as they integrated their economies with the rest of the world.

Sounds like good news, right?

It is good news, but those who fixate on inequality are worried.

…while globalization might on average be good for growth, more might not always be better for all. …When we shift the analysis to how income gains from globalization are distributed within countries, we also find globalization to have different effects on different incomes…gains are, however, distributed unequally both across and within countries. …Within countries, income inequality increases as a consequence of globalization. The income gains resulting from globalization tend to go primarily to the top of the national income distributions.

In other words, rich people are getting richer at a faster pace.

This phenomenon is captured in these two charts, which show that globalization is associated with more growth and more inequality.

But what’s important is that poor people also are getting richer.

In the subsample of developing countries where the gains from globalization are generally larger, however, they also reach the bottom of the income distribution and reduce poverty. … We find…some evidence of a poverty reducing effect of globalization in developing countries.

Consider, for example, the remarkable data I shared about China. Income inequality increased at the same time that poverty dramatically declined.

And those results seem to hold for the rest of the world, especially in developing nations.

So now let’s look at the most important chart from the IMF study, which shows that all income groups enjoy more prosperity with globalization.

Yes, rich people benefit the most, so official inequality numbers will increase.

But put yourself in the shoes of a poor person. Would you be willing to forego your additional income in order to deny additional income for a rich person? I suspect the vast majority of poor people would think that’s a crazy question.

But, as Margaret Thatcher pointed out, there are plenty of folks on the left who think that’s a perfectly reasonable position. Including, incidentally, some of the people at the IMF.

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The good news about China is that economic liberalization has produced impressive growth in recent decades, which has helped bring hundreds of millions of people out of poverty.

The bad news is that China started from such a low position that per-capita income is still quite low compared to rich nations.

So what does the economic future hold? Will China continue its upward trajectory?

That’s certainly possible, but it depends on the Chinese government. Will there be additional liberalization, giving the economy more “breathing room” to grow?

Not if the government listens to the bureaucrats at the International Monetary Fund. I wrote three years ago about an IMF study that recommended huge tax increases in China.

And now there’s another IMF report pushing for big tax hikes. Only instead of arguing that higher taxes somehow will produce more growth by financing a bigger burden of government (which – no joke – was the core argument in the 2105 study), this new report claims higher taxes will produce more growth by reducing inequality.

Here’s the basic premise of the paper.

…economic growth has not benefited all segments of the population equally or at the same pace, causing income disparities to grow, resulting in a large increase in income inequality… This is especially of concern as the recent literature has found that elevated levels of inequality are harmful for the pace and sustainability of growth… The paper discusses what additional policies can be deployed to improve equity in opportunities and outcomes, with particular focus on the role for fiscal policy.

But a key part of the premise – the blanket assertion that inequality undermines growth – is junk.

As I noted in 2015 when debunking a different IMF study, “..they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.”

Let’s dig into the details of this new IMF study.

Here’s the problem, at least according to the bureaucrats.

Income inequality in China today, as measured by the Gini coefficient, is among the highest in the world. …Furthermore, the Gini coefficient has rapidly increased over the last two decades, by a total of about 15 Gini points since 1990.

And here’s the chart that supposedly should cause angst. It shows that inequality began to rise as China shifted toward capitalism.

But why is this inequality a bad thing, assuming rich people earned their money honestly?

When markets are allowed to function, people become rich by providing value to the rest of us. In other words, it’s not a zero-sum game.

Ironically, the IMF study actually makes my point.

…much of China’s population has experienced rising real incomes. …even for the bottom 10 percent incomes rose by as much as 63 percent between 1980 and 2015… This has implied that China reduced the share of people living in poverty immensely. Measured by the headcount ratio, the population in poverty decreased by 86 percentage points from 1980 to 2013 (see figure 6), the most rapid reduction in history.

And here’s the aforementioned Figure 6, which is the data worth celebrating.

Any normal person will look at this chart and conclude that China should do more liberalization.

But not the bureaucrats at the IMF. With their zero-sum mentality, they fixate on the inequality chart.

Which leads them to make horrifyingly bad recommendations.

…several reforms could be envisaged to make fiscal policy more inclusive, both on the tax and expenditure side. …revenues from PIT contribute only around 5 percent of total revenues, a much lower share than the OECD average of 25 percent. Increasing the reliance on PIT, which more easily accommodates a progressive structure, could allow China to improve redistribution through the tax system. …While the PIT in China already embeds a progressive schedule with marginal rates increasing with income from 3 to 45 percent, …redesigning the tax brackets would ensure that middle and high income households with higher ability to pay contribute more to financing the national budget… Property and wealth taxes remain limited in China. Such taxes are broadly viewed as progressive, because high-income households usually tend also to have more property and wealth. …Consideration should therefore be given to adopt a recurrent market-value based property tax.

And why do IMF bureaucrats want all these additional growth-stifling taxes?

To finance a larger burden of government spending.

China still lags other emerging economies and OECD countries in public spending on education, health and social assistance. …social expenditure will need to be boosted.

In other words, the IMF is suggesting that China should copy welfare states such as Italy and France.

Except those nations at least enjoyed a lengthy period before World War II when government was very small. That’s when they became relatively rich.

The IMF wants China to adopt big government today, which is a recipe to short-circuit prosperity.

P.S. I don’t think the IMF is motivated by animus towards China. The bureaucrats are equal-opportunity dispensers of bad advice.

P.P.S. The OECD also is trying to undermine growth in China.

P.P.P.S. There are some senior-level Chinese officials who understand the downsides of a welfare state.

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A couple of months ago, I thought I did something meaningful by sharing six separate examples of the International Monetary Fund pressuring sub-Saharan African nations to impose higher tax burdens. This was evidence, I suggested, that the IMF had a disturbing agenda of bigger government for the entire region.

I didn’t imply the bureaucrats were motivated by racism. After all, the IMF has pushed for higher taxes in the United States, in China, in Latin America, in the Middle East, and in Europe. (folks who work at the IMF don’t pay taxes on their own salaries, but they clearly believe in equal opportunity when urging higher taxes for everyone else).

Nonetheless, I thought it was scandalous that the IMF was systematically agitating for taxes in a region that desperately needs more investment and entrepreneurship. And my six examples were proof of a continent-wide agenda!

But it turns out that I wasn’t exposing some sort of sinister secret. The IMF just published a new report where the bureaucrats openly argue that there should be big tax hikes in all sub-Saharan nations.

Domestic revenue mobilization is one of the most pressing policy challenges facing sub-Saharan African countries. …the region as a whole could mobilize about 3 to 5 percent of GDP, on average, in additional revenues. …domestic revenue mobilization should be a key component of any fiscal consolidation strategy. Absent adequate efforts to raise domestic revenues, fiscal consolidation tends to rely excessively on reductions in public spending.

Notice, by the way, the term “domestic revenue mobilization.” Such a charming euphemism for higher taxes.

And it’s also worth pointing out that the IMF openly urges more revenue so that governments don’t have to impose spending restraint.

Moreover, the IMF is happy that there have been “substantial gains in revenue mobilization” over the past two decades.

Over the past three decades, many sub-Saharan African countries have achieved substantial gains in revenue mobilization. For the median sub-Saharan African economy, total revenue excluding grants increased from around 14 percent of GDP in the mid-1990s, to more than 18 percent in 2016, while tax revenue increased from 11 to 15 percent. …Two-thirds of sub-Saharan African countries now have revenue ratios above 15 percent, compared with fewer than half in 1995. …the region still has the lowest revenue-to-GDP ratio compared to other regions in the world. The good news is that there are signs of convergence. Over the past three decades, the increase in sub-Saharan Africa’s revenue ratio has been double that for all emerging market and developing economies.

To the bureaucrats at the IMF, the “convergence” toward higher taxes is “good news.”

However, there is some data in the report that is genuine good news.

In most regions of the world, there has been a trend in recent years toward reducing rates for the CIT and the personal income tax (PIT). In sub-Saharan African countries, the average top PIT rate has been reduced from about 44 to 32 percent since 2000, while average top CIT rates have been reduced by more than 5 percentage points during the same period.

Here are two charts showing the decline in tax rates, not only in Africa, but in most other regions.

By the way, the IMF bureaucrats appear to be surprised that revenues went up as tax rates went down. I guess they’ve never heard of the Laffer Curve.

Despite this decline in rates, total direct taxes (PIT and CIT) as a percentage of GDP have been trending upward.

But the IMF obviously didn’t learn from this evidence (or from the evidence it shared last year).

Rather than proposing lower tax rates, the report urges a plethora of tax hikes.

Successful experiences in revenue mobilization have relied on efforts to implement broad-based VATs, gradually expand the base for direct taxes (CIT and PIT), and implement a system to tax small businesses and levy excises on a few key items.

Wow. I don’t know what’s worse, claiming that tax increases are good for growth, or pushing higher taxes in the world’s poorest region.

Let’s close by debunking the IMF’s absurd contention that bigger government would be good for Africa.

I suppose the simplest response would be to share my video series about the economics of government spending, especially since I cite a wealth of academic research.

But let’s take an even simpler approach. The IMF report complained that governments in sub-Saharan Africa don’t have enough money to spend.

The good news, as illustrated by this chart (based on data from the bureaucracy’s World Economic Outlook database), is that the IMF is accurate about relative fiscal burdens.

The bad news is that the IMF wants us to believe that a low fiscal burden is a bad thing. The bureaucrats at the IMF (and at other international bureaucracies) actually want people to believe that bigger government means more prosperity. Which is why the report urges big tax hikes.

But you won’t be surprised to learn that the IMF doesn’t provide any evidence for this bizarre assertion.

Though I’ve had folks on the left sometimes tell me that bigger government must be good for growth because rich nations in the western world have bigger governments while poor nations in Africa have comparatively small governments.

If you want to get in the weeds of public finance theory, the IMF bureaucrats are misinterpreting Wagner’s Law.

But there’s no need to delve into theory. When people make this assertion to me, I challenge them to identify a poor nation that ever became a rich nation with big government.

It’s true, of course, that there are rich nations that have big governments, but all of those countries became rich in the 1800s when government was very small and welfare state programs were basically nonexistent.

So let’s take the previous chart, which supposedly showed too little spending in sub-Saharan Africa, and add another column (in red) showing the level of government spending in North America and Western Europe in the 1800s.

The obvious takeaway is that African nations should cut taxes and reducing spending. The exact opposite of what the IMF recommends.

In other words, the IMF’s agenda of bigger government and higher taxes is a recipe for continued poverty.

But keep in mind that fiscal policy is just one piece of the puzzle. As explained in Economic Freedom of the World, a nation’s prosperity also is affected by regulatory policy, trade policy, monetary policy, and quality of governance.

And nations in sub-Saharan Africa generally score even lower in those areas than they do for fiscal policy. So while those countries should reduce their fiscal burdens, it’s probably even more important for them to address other policy mistakes.

To end on an upbeat note, here’s a video from Reason about how free markets can help bring prosperity to Africa.

I also recommend this video from the Center for Freedom and Prosperity since it does a great job of debunking the argument that higher taxes and bigger government are a recipe for prosperity.

And this video about Botswana is a good case study of how African nations can enjoy more prosperity with market-oriented policy.

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If you were exempted from taxation, you’d presumably be very happy. After all, even folks on the left do everything they can to minimize their tax payments.

Now imagine that you are put in charge of tax policy.

Like Elizabeth Warren, you obviously won’t volunteer to start paying tax, but what would you recommend for other people?

Would you want them to also enjoy tax-free status, or at least get to experience a smaller tax burden? Or would you take a malicious approach and suggest tax increases, comforted by the fact that you wouldn’t be affected?

In this theoretical scenario, I hope most of us would choose the former approach and seek tax cuts.

But not everybody feels the same way. The bureaucrats at the International Monetary Fund actually do receive tax-free salaries. Yet instead of seeking to share their good fortune with others, they routinely and reflexively urge higher taxes on the rest of us. Here are some articles, all from the past 12 months, that I’ve written about the IMF’s love affair with punitive taxation.

  • Last June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
  • Last July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
  • Last October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.
  • Also in October, I wrote about the IMF concocting a measure of “fiscal space” to justify higher taxes across the globe.
  • Last November, I wrote about the IMF publishing a study expanding on its claim that equal poverty is better than unequal prosperity.
  • This February, I wrote about the IMF advocating more double taxation of income that is saved and invested.

Needless to say, I especially don’t like it when the IMF urges higher taxes in America.

But I think everybody should have more freedom and prosperity, so I also don’t like it when the IMF pushes tax hikes elsewhere. I don’t like it when the tax-free bureaucrats advocate higher taxes on an entire region. I don’t like it when they push a high-tax agenda on big countries. I don’t like it when they urge tax increases on small countries.

What upsets me most of all, however, is that the IMF is trying to punish very poor nations is sub-Saharan Africa.

This came to my attention when I saw a Bloomberg report about the IMF recommending policy changes in Ivory Coast. At first glance, I thought the IMF was doing something sensible, supporting faster growth and higher income.

Ivory Coast must improve its tax system if the world’s biggest cocoa producer wants to maintain economic growth of at least 7 percent, the International Monetary Fund said. Jose Gijon, the resident representative for the Washington-based lender, said in an interview in the commercial capital of Abidjan Wednesday. “…if it wants to become an emerging country and for that, it needs higher income.”

But I found out that the bureaucrats wanted higher income for the government.

“The key for Ivory Coast is revenue…The government needs to create sufficient fiscal space…”

Unsurprisingly, local politicians like the idea of getting more loot.

The government seeks to gradually increase its tax revenue to 20 percent of gross domestic product from 15.9 percent now, Prime Minister Amadou Gon Coulibaly said in 2017.

How sad. Ivory Coast (now usually known as Côte d’Ivoire) is a very poor country, with living standards akin to those of the United States in 1860. Yet rather than recommend the policies that allowed the United States and other western nations to become rich, such as no income tax and very small government, the IMF wants to fatten the coffers of a corrupt and ineffective public sector.

Here’s something else that is sad. This seems to be the advice the IMF gives to all nations in sub-Saharan Africa.

Consider this story from Kenya.

Kenyans should brace themselves for higher taxes after the Government caved in to the International Monetary Fund’s (IMF) demands. …It made the commitment to the IMF in a letter of intent that spells out a raft of measures that are likely to eat into consumers’ pockets. …The sectors to be hit include agriculture, manufacturing, education, health, tourism, finance, social work, and energy. …The Government hopes to squeeze an extra Sh40 billion in taxes from these sectors. This is likely to have a ripple effect by pushing up the cost of goods and services… The Government intends to increase income tax by over Sh100 billion in the financial year 2018/19.

We also have the IMF’s perverse approach to “tax reform” in Nigeria.

The International Monetary Fund (IMF) has advised Nigeria to embark on a full Value Added Tax (VAT) reform. …The lender’s Mission Chief for Nigeria, African Department, Mr Amine Mati, …said government must raise taxes… In addition, government should also increase taxes on alcohol and tobacco and broaden VAT.

The bureaucrats also want more tax revenue in Tanzania.

The International Monetary Fund (IMF) Deputy Managing Director, Tao Zhang has hailed Tanzania for managing to boost tax collection… The visiting IMF leader said it was vital to mobilise more…public resources by strengthening tax collection… “it is crucial to mobilise more…public resources within Tanzania, especially by strengthening tax collection…” he said at a public lecture he gave in Dar es Salaam yesterday.

The IMF is even using a $190 million bribe to advocate higher taxes in Ghana.

Ghana needs to improve revenue collection…to achieve its fiscal targets, the International Monetary Fund said. …“Fiscal consolidation has to be revenue-based,” Koliadina told reporters in the capital, Accra. …A positive outcome of the fifth and sixth reviews of the program will lead to the IMF disbursing $190 million to Ghana, Koliadina said.

Last but not least, let’s look at the IMF’s misguided advice for Botswana.

The Government of Botswana should seek to strengthen its revenue base…, the International Monetary Fund has said. …”The authorities agreed that there is a significant potential to boost domestic revenues through tax administration and tax policy reforms that could…provide additional funding for future fiscal expenditures,” the report stated.

Higher taxes to finance bigger government? Wow, talk about economic malpractice.

Since Botswana has been one of the few bright spots in Africa, I hope lawmakers tell the IMF to get lost. But I worry that politicians will be happy to take the IMF’s bad advice.

How tragic.

These are the only nations I investigated, so I guess it’s possible that there’s a sub-Saharan nation where the IMF hasn’t recommended higher taxes. Heck, it’s even theoretically possible that the bureaucrats may have suggested lower taxes somewhere on the continent (though that’s about as likely me playing pro football next season).

I’ll simply note that the IMF openly admits that it wants higher taxes all across the region.

Tax revenues play a critical role for countries to create room in their budgets to increase spending on social services…raising tax revenues is the most growth-friendly way to stabilize debt. More broadly, building a country’s tax capacity is at the center of any viable development strategy…we see potential in many countries of sub-Saharan Africa to raise tax revenues by about one percent of GDP per year over the next five or so years. …Since building the capacity to collect more from personal income taxes takes time, in the next few years VAT and excise taxes likely offer the biggest potential for additional revenue. For example, recent studies by the IMF indicate a revenue potential of about 3 percent of GDP from VAT in Cape Verde, Senegal, and Uganda, and ½ percent of GDP from excises for all countries in sub-Saharan Africa. …It is also important to consider newer sources of revenue, such as property taxes. …Raising revenues is often a politically difficult task. But the current economic junction in sub-Saharan Africa together with sustained development needs creates an imperative for action now.

I’m almost at a loss for words. It’s mind-boggling that anybody could look at policy in sub-Saharan Africa and conclude that the recipe for growth is giving more money to politicians.

And I’m equally flabbergasted that the IMF openly claims that bigger government is good for growth. Unsurprisingly, the bureaucrats never try to justify that bizarre and anti-empirical assertion.

For those who are interested in genuinely sensible information on how poor nations can become rich nations, I strongly recommend this video from the Center for Freedom and Prosperity.

P.S. Back in 2015, to mock the pervasive statism at the Organization for Economic Cooperation and Development, I created a fake fill-in-the-blanks/multiple-choice template. A similar exercise for the IMF would only require one short sentence: “The nation of __ should raise taxes.”

P.P.S. In other words, this cartoon is very accurate.

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I’m not a fan of international bureaucracies, but they’re not universally bad. Yes, we almost always get a bad policy agenda from the left-leaning political appointees who run these organizations.

But it’s also true that the professional economists at these bureaucracies oftentimes produce solid reasearch. A good example is the new study of the American fiscal system by three economists at the International Monetary Fund.

They start with an observation that should be uncontroversial, but is nonetheless surprising given the tendency of the IMF’s leadership to advocate more taxes.

The consensus is that reducing distortionary taxes on labor and capital income can stimulate economic activity by encouraging an increase in labor supply and higher savings. Indeed, the empirical literature on tax multipliers is vast and points to measurable effects of reducing taxes on output and employment.

I’m delighted by these two sentences. Makes me wonder why the political types who run the IMF overlook these basic insights when they’re bullying governments into enacting higher tax rates!

But let’s set that aside and look at the specific findings in this report. Here’s what the IMF tried to calculate.

We simulate three types of tax policy changes (i) A “middle-class tax cut” which reduces the effective tax rates for households earning between 0.5 to 4 times the median income and is offset by lower government spending; (ii) A “middle-class tax cut” and an EITC expansion that is fully financed by an increase in consumption taxes; (iii) tax cut for high income groups that is also combined with an EITC expansion and financed by a higher consumption tax.

Since I’ve pointed out that not all tax cuts are created equal, I think this kind of research can be very helpful.

Here are the core findings from the IMF’s analysis.

The model generates positive effects on growth, consumption and investment that are broadly in line with the recent empirical literature on PIT multipliers. Despite the positive macro response, supply side effects are never strong enough to prevent cuts from being revenue losing (i.e., tax cuts do not “pay for themselves”). …A tax cut for the middle-class, financed from a lump-sum reduction in government spending, results in a loss of revenues of 0.8 percent of GDP but raises the steady state GDP by just under 1 percent after 5 years (i.e., a personal income tax multiplier of 1.1). …growth effects are smaller when lower personal income taxes are paid for with a VAT. …Tax cuts for higher income groups tend to have a stronger aggregate impact than tax cuts for the middle class. Indeed, in the simple case where the tax cuts are paid for by lump sum cuts in government spending, the personal income tax multiplier is around 3. … tax cuts that are incident on high income households increase income polarization.

This all makes sense. Lower tax rates are good for growth, particularly if offset by reductions in the burden of government spending.

And since lower tax rates are only self-financing in very rare circumstances, I have no problem with the conclusion about lower revenues.

Indeed, the concluding section about “income polarization” was the only part of the above excerpt that rubbed me the wrong way. And even then, I’m only irked because of the implication that lower tax rates might be a bad idea if the rich get richer faster than the poor get richer.

While I like the overall findings, I want to focus on two details from the study.

First, let’s look at the results for middle-class tax cuts. The IMF researchers looked at two versions, with one tax cut financed by lower spending and the other tax cut financed by higher consumption taxation.

As you can see from these two charts, you get more growth and higher wages when you simultaneously reduce taxes and spending.

Second, let’s look at the IMF’s comparison of middle-class tax cuts and tax cuts for high-income people. The conclusion is that you get more bang-for-the-buck when lowering tax rates at the top.

…there are larger growth effects when the tax cut is incident on the higher income groups. The reasons behind this are two-fold: First, the top quintile responds to lower taxes by saving more which, in the closed economy version of the model, leads to more capital formation and a decline in the equilibrium real interest rate. Second, those receiving a reduction in their tax rate supply more high-skilled labor which helps boost output.

By the way, I should hasten to add that this isn’t an argument against middle-class tax relief. As far as I’m concerned, all taxpayers are sending too much money to politicians.

I’m merely highlighting this analysis because some types of tax cuts have larger growth effects. For what it’s worth, I’m not even sure I agree with the IMF’s analysis of why lower tax rates on the rich produce more growth. I suspect the main reason for the stronger results is that high-income taxpayers have much greater ability to change their behavior in response to altered incentives.

In any event, here’s the IMF’s comparison of the two types of tax cuts and what happens to output, consumption, and investment.

P.S. Since we’re discussing the occasional good work of international bureaucracies, here’s my favorite World Bank study and here’s my favorite OECD study.

P.P.S. I’ve never seen any good research from the United Nations. I’m not claiming there’s never been an economically sound study from that bureaucracy. All I’m saying is that I’ve never run across an example.

P.P.P.S. I don’t know if the European Central Bank should be characterized as an international bureaucracy, but it definitely has the highest percentage of quality research (see here, here, here, here, here, and here for examples).

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The worst-international-bureaucracy contest is heating up.

In recent years, the prize has belonged to the Paris-based Organization for Economic Cooperation and Development for reasons outlined in this interview. Indeed, I’ve even argued that subsidies for the OECD are the worst expenditure in the federal budget, at least when measured on a damage-per-dollar-spent basis.

But the International Monetary Fund stepped up its game in 2017, pushing statism to a much higher level.

  • In June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
  • In July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
  • In October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.
  • Also in October, I wrote about the IMF concocting a measure of “fiscal space” to justify higher taxes across the globe.
  • In November, I wrote about the IMF publishing a study expanding on its claim that equal poverty is better than unequal prosperity.

And the IMF is continuing its jihad against taxpayers in 2018.

The head bureaucrat at the IMF just unleashed a harsh attack on the recent tax reform in the United States, warning that other nations might now feel compelled to make their tax systems less onerous.

IMF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending. …It also will fuel inflation, she said. “What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing,”’ Lagarde said.

Heaven forbid we have lower tax rates and more growth!

Though the really amazing part of that passage is that Ms. Lagarde apparently believes in the silly notion that tax cuts are inflationary. Leftists made the same argument against the Reagan tax cuts. Fortunately, their opposition we ineffective, Reagan slashed tax rates and inflation dramatically declined.

What’s also noteworthy, as illustrated by this next excerpt, is that Lagarde doesn’t even bother with the usual insincere rhetoric about using new revenues to reduce red ink. Instead, she openly urges more class-warfare taxation to finance ever-bigger government.

The IMF chief’s blunt assessment follows an unusually public disagreement between the fund and President Donald Trump’s administration last fall over an IMF paper arguing that developed nations can share prosperity more evenly, without sacrificing growth, by shifting the income-tax burden onto the rich. Competitive tax cuts risk holding back governments in spending on anything from defense and infrastructure to health and education, Lagarde said.

What makes her statements so absurd is that even IMF economists have found that higher taxes and bigger government depress economic activity. But Ms. Largarde apparently doesn’t care because she’s trying to please the politicians who appointed her.

By the way, keep in mind that Ms. LaGarde’s enormous salary is tax free, as are the munificent compensation packages of all IMF employees. So it takes enormous chutzpah for her to push for higher taxes on the serfs in the economy’s productive sector.

But it’s not just Lagarde. We also have a new publication by two senior IMF bureaucrats that urges more punitive taxes on saving and investment.

Although Thomas Piketty has famously proposed a coordinated global wealth tax of the wealthiest at two percent, there are now very few effective explicit wealth taxes in either developing or advanced economies. Indeed between 1985 and 2007, the number of OECD countries with an active wealth tax fell from twelve to just four. And many of those were, and are, of limited effectiveness. …This hot topic of how tax systems can assist in addressing excessive increases in wealth inequality was discussed at the regular IMF-World Bank session on taxation last October. …some among the very rich recognize some social benefit from being taxed more heavily (for instance, Bill Gates’ father). Perhaps then there is more that can be done to foster that sense of social responsibility… The exchange of tax information between countries is a powerful tool…and perhaps ultimately game-changing approach to the taxation of the wealthy…we do see good cause to be less pessimistic than even a few years ago.

Once again, we can debunk the IMF by….well, by citing the IMF. The professional economists at the bureaucracy have produced research showing that discriminatory taxes on capital are very bad for prosperity.

But the top bureaucrats at the organization are driven by either by statist ideology or by self interest (i.e., currying favor with the governments that decide senior-level slots).

The bottom line is that perhaps the IMF should be renamed the Anti-Empirical Monetary Fund.

And with regards to worst-international-bureaucracy contest, I fully expect the OECD to quickly produce something awful to justify its claim to first place.

P.S. I’m not a fan of the United Nations, but that bureaucracy generally is too ineffective to compete with the IMF and OECD.

P.P.S. The World Bank also does things I don’t like (as well as some good things), but it generally doesn’t push a statist policy agenda, at least compared to the nefarious actions of OECD and IMF.

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