IMF tax stance is music to Labour economists’ ears | Larry Elliott

12 Oct

To put it mildly, the Labour party’s relationship with the International Monetary Fund has not always been a happy one.

Memories of 1976, when an IMF team forced Jim Callaghan’s government to cut public spending in return for an emergency loan, are powerful to this day.

So when shadow chancellor John McDonnell was drawing up the tax plans included in Labour’s general election manifesto, the IMF would have been a long way down the list of organisations from which he might have expected an endorsement.

Yet, in its latest fiscal monitor, that is precisely what the IMF has done. Not explicitly, of course. The report is careful not to say which countries should be thinking about raising the top rate of tax. Still less does it say that the right level should be the 50% proposed by Labour.

But that doesn’t really matter because what the IMF has done is provide some high-level support for Labour’s basic approach.

The fiscal monitor notes that tax systems have become less good at offsetting inequality during a period when the average marginal rate of income tax in western countries has been cut from 62% to 35%.

The justification for allowing the rich to keep more of their income has always been that it is good for growth because lower tax means more risk-taking, more entrepreneurship and higher growth.

Yet there is no evidence that making life sweeter for the rich has done anything other than make them richer. Trickle-down economics is bunk.

To be clear, the IMF is not saying that it would be a good idea to return to the 1970s peak of an income tax rate of 83%.

But it is saying the rich could pay more tax without hindering growth, provided the increase is not excessive. Even with that caveat, that conclusion is extremely welcome for Labour.

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