MercoPress. South Atlantic News Agency

IMF shocks orthodoxy: tax the rich and target multinationals to fight budget deficits

“It’s clearly something finance ministers are interested in; it’s something that is necessary for the right balance of public finances” said Lagarde

Tax the rich and better target the multinationals: The IMF has set off shock waves in Washington by suggesting countries fight budget deficits by raising taxes. Tucked inside a report on public debt, the new tack was mostly eclipsed by worries about the US budget crisis, but did not escape the notice of experts and nongovernmental organizations.

“We had to read it twice to be sure we had really understood it,” said Nicolas Mombrial, the head of Oxfam in Washington. “It’s rare that IMF proposals are so surprising.”

Guardian of financial orthodoxy, the IMF, which held its annual meetings with the World Bank last week in the U.S. capital, typically calls for nations in difficulty to slash public spending to reduce their deficits.

But in its Fiscal Monitor report, subtitled “Taxing Times,” the IMF advanced the idea of taxing the highest-income people and their assets to reinforce the legitimacy of spending cuts and fight against growing income inequality.

“Scope seems to exist in many advanced economies to raise more revenue from the top of the income distribution,” the IMF wrote, noting “steep cuts” in top rates since the early 1980s. According to IMF estimates, taxing the rich even at the same rates during the 1980s would reap fiscal revenues equal to 0.25% of economic output in developed countries.

“The gain could in some cases, such as that of the United States, be more significant,” around 1.5% of GDP, said the IMF report, which also singled out deficient taxation of multinational companies. In the US alone, legal loopholes deprive the Treasury of roughly 60 billion dollars in receipts, the global lender said.

The 188-nation IMF said that it did not want to enter into a debate on whether the rich should pay more taxes. But it said: “The chance to review international tax architecture seems to come about once a century; the fundamental issues should not be ducked.”

IMF chief Christine Lagarde, kept up the sales pitch for a more just fiscal policy. “It’s clearly something finance ministers are interested in, it’s something that is necessary for the right balance of public finances,” said Lagarde a former French finance minister, in a panel discuss. “There are lots of wasted opportunities,” she added.

After the French Socialist government’s proposal of a 75% tax on the wealthy was overturned by the country’s highest court last year, France’s finance minister cautiously welcomed the IMF new direction.

“If the core idea is that fiscal policy is a policy that aims to reduce inequalities, I wouldn’t know how to protest against that,” Finance Minister Pierre Moscovici said at a news conference in Washington. The minister said it was a “positive development” but he downplayed that it marked a “significant change” for the IMF.

But the IMF Copernican revolution is still in the twilight stage. In its report, the IMF continued to push for a wider scope for value-added tax, a consumption tax that some say is inherently unfair, and on reductions in public spending.

“These proposals are heading in the right direction, but a lot remains to be done,” said Oxfam’s Mombrial, calling notably for the IMF to do more against illegal capital flows, which, according to the NGO, cost billions of dollars in fiscal revenues in the developing countries.