IMF calls for higher taxes on the wealthy

The International Monetary Fund [IMF] says "significantly higher" taxes on the wealthy and capital gains taxes are needed to fight inequality.

In its latest half-yearly Fiscal Monitor report, the IMF says while inequality on a global scale has decreased thanks to fast-growing economies in China and India, "income inequality has increased in most advanced economies".

It notes the top income tax rates in OECD countries, like New Zealand, have decreased from around 62 percent in 1981 to 35 percent now. At the same time, the share of income going to the top 5 percent of earners has steadily increased, only briefly dipping in the wake of the global financial crisis.

"While some inequality is inevitable in a market-based economic system, excessive inequality can erode social cohesion, lead to political polarisation, and ultimately lower economic growth," the IMF said.

"Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates, which have been on a declining trend."

New Zealand, like most countries, has a progressive tax system - that's where income over certain thresholds is taxed at a higher rate. For example, on every dollar you earn under $14,000, you pay 10.5 percent tax, but for every dollar between $48,000 and $70,000 you pay 30 percent. New Zealand's top tax rate is presently 33 percent, charged on every dollar earned above $70,000.

New Zealand's top tax rate peaked at 90 percent in the 1940s, and was as high as 67 percent until 1988. It is presently 33 percent.

Right-leaning parties say lower taxes, particularly on high earners, lead to increased investment and higher growth - but the IMF says "empirical results do not support this argument, at least for levels of progressivity that are not excessive".

"Advanced economies with relatively low levels of progressivity in their personal income tax may therefore have scope for raising the top marginal tax rates without hampering economic growth."

Tax systems are also often not as progressive as they look, says the IMF, because "because wealthy individuals have more access to tax relief".

Another option governments have is taxing capital, which is distributed even less fairly than income.

"Capital income is distributed more unequally than labour income, its share in total income has risen over recent decades, and it is often taxed at a lower [and declining] rate than labour income," the IMF says.

"Many countries should emphasize reducing opportunities for tax evasion and avoidance. Taxes on real estate or land are both equitable and efficient and remain underused."

But the IMF is sceptical politicians will heed its message.

"This could be difficult to implement politically, because better-off individuals tend to have more political influence, for example, through lobbying, access to media, and greater political engagement."