New IMF research: tax affects inequality; inequality affects growth

IMF top tax rates inequalityThis new graph from the IMF is just the latest piece of research that follows on from the in-depth work of Thomas Piketty and others looking at the relationship between top income tax rates and inequality. The graph here makes the point adequately. Put crudely, the lower the top tax rate, the more inequality will rise.

The IMF discussion note is called Causes and Consequences of Income Inequality: A Global Perspective, and it goes far beyond tax. It was summarised, not inaccurately, in the Pacific Standard, thus:

“The IMF Confirms That ‘Trickle-Down’ Economics Is, Indeed, a Joke”

Among other important things, the IMF report looks at the relationship between inequality and growth:

“If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.”

In other words, the more inequality, the lower the growth. Not a new conclusion, but useful new global data.

Why might higher inequality harm growth? Well, the IMF outlines a few reasons:

  • Inequality damages poorer households and makes them less able to contribute
  • Reduces demand in an economy, because the rich spend less of the income than the poor do
  • Higher inequality seems to be associated with more frequent and bigger financial crises, particularly due to higher borrowing (to “keep up with the Joneses”)
  • Inequality contributes to global macroeconomic imbalances
  • Extreme inequality may intensify grievances, foster conflicts, and make dispute resolution harder
  • Inequality can create worse economic policies. For example, “enhanced power by the elite could result in a more limited provision of public goods that boost productivity and growth, and which disproportionately benefit the poor”
  • In unequal countries, growth is less efficient in lowering poverty, which harms growth.

Finally, a graph looking at how workers have been collecting a steadily lower share of the spoils (and capital-owners have therefore been hoovering up a greater share) over a relatively short time-frame, in country after country.

IMF wages productivity

There’s also a nice little graph on corporate taxes, which Fools’ Gold has picked up on.

Enough said, for now.



Related Posts

New estimates reveal the extent of tax avoidance by multinationals

Price Waterhouse CoopersNew figures published today by the Tax Justice Network provide a country-level breakdown of the estimated tax losses to profit shifting by multinational companies. Applying a methodology developed by researchers at the International Monetary Fund to an improved dataset, the results indicate global losses of around $500 billion a year. The figures appear in a […]


Banking Secrecy in China, its related territories and Taiwan

Hong Kong from Sky 100Foreword. The Tax Justice Network is a non partisan network of experts working towards transparency, so we do not take any position about countries’ territorial and political claims. However, we do expect countries with a de jure (legal) or de facto (in practice) influence over other territories, to take responsibility for their power. We point […]


Is tax avoidance at the heart of Ireland’s economic miracle?

AIB International Finance Centre Dublin - By Estoy Aquí (Own work) [GFDL ( or CC BY 3.0 (], via Wikimedia CommonsComing out of the economic crisis Ireland was one of the best performing economies, with GDP growth rates of 8.5% in 2014 and an extraordinary 26.3% in 2015. But how much of this economic activity was real, and how much a fiction created by Ireland’s tax haven status? A new paper by Heike Joebges of the University […]


New Report: HMRC’s “Building our Future” programme

bigben-mcbigbenfaceYesterday the Tax Justice Network was in the UK Parliament to launch a report it co-produced with the Public and Commercial Services Union. The report, entitled “HMRC, Building an Uncertain Future” is a study of HMRC’s (the UK tax authority) reform plans which it is calling “Building our Future”. The report published yesterday analysed the […]


Financial secrecy in football: time for action

bigben-mcbigbenfaceEveryone has known for years that football is rotten to the core and financial secrecy is at the heart of the problem. Why then is no one doing anything about it? This post from the Offshore Game project originally features in the Independent. 


Leave a Reply

Your email address will not be published. Required fields are marked *

Back to Top