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IMF Economists Say Taxing the Rich Is Good for the Economy

March 2, 2014 by Brett Wilkins in Rich & Poor with 0 Comments
Occupy San Francisco demonstrators protest against income inequality (Photo: Brett Wilkins)

Occupy San Francisco demonstrators protest against income inequality (Photo: Brett Wilkins)

A trio of International Monetary Fund economists has released a new study that seems to debunk a central pillar of conservative economic ideology– that taxing the rich to help the poor harms the economy.

In a paper titled “Redistribution, Inequality and Growth,” IMF researchers Jonathan Ostry, Andrew Berg and Charlambos Tsangarides compared pre- and post-tax data from a large sampling of nations, finding convincing evidence that lower net inequality bolsters the economy and enables longer periods of economic expansion. Not only did the authors find that policies promoting income redistribution strengthen growth, they also concluded there is a general consensus that inequality can fuel political as well as economic instability.

“We find that higher inequality seems to lower growth,” the authors wrote. “Redistribution, in contrast, has a tiny and statistically insignificant (slightly negative) effect. This implies that, rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect.”

The authors’ findings seem to fly in the face of conventional wisdom in capitalist societies, which is that higher taxes on people who conservatives often call “job creators” are detrimental to overall economic growth. But the IMF economists insist otherwise.

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

But instead, they found that “faster and more durable growth seems to have followed the associated reduction in inequality,” and that “the average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth.”

The paper’s authors do concede that “after some point, redistribution will be destructive of growth,” although they do not identify that point and urge further study of the issue.

The issue of income inequality has increasingly been part of a divisive national debate in the United States. Conservatives have overwhelmingly championed “supply-side,” or “trickle-down” economics, characterized by lower taxes, minimal government regulation and unfettered markets. Popularized by “Reaganomics” in the 1980s, their mantra has been “a rising tide lifts all ships.”

On the other side of the political spectrum, progressives point to the fact that one in six Americans is now living in poverty, and that inflation-adjusted after-tax income for the wealthiest one percent of US households soared 275 percent over the past three decades while nearly stagnating for the poorest 20 percent as proof that a rising tide does not lift all ships, especially when taxes on the “yachting class” have been repeatedly slashed at the expense of the “dinghy class.”

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