In my City AM column on Tuesday, I outlined how the IMF’s most recent Fiscal Monitor document, entitled “Taxing Times”, laid the intellectual work for an escalation of the tax burden (particularly on the wealthy). It was a huge shift from what you might expect the IMF to say. Sure, there were the usual recommendations for pro-growth tax reform and the acknowledgement that many European countries in particular were already towards taxable capacity. Nevertheless, the IMF then laid out a menu of “options” from higher marginal income tax rates on top earners to outright wealth confiscation to try to ease the debt burden (“reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth”).
I’ve been meaning to write some more about some of the inconsistencies of the paper. For example, that it admits that “one-off capital levies” haven’t worked as expected in lowering debt burdens, but then offers them up anyway. But this article from Forbes hits the main take home points that one should consider when reading the document:
1) The fact that a 10 percent tax rate on *everyone* with positive net wealth would be required to get debt back to 2007 levels shows that there are not enough “super-rich” alone to do it, i.e. this idea perpetuated that confiscating property of the rich would solve all of our problems is bunkum.
2) Even were this extreme measure to be taken, we’d still be just back to where we were in 2007 in debt terms and with the budget impact of an ageing population going forward.
3) The IMF only outlines two other alternatives to debt confiscation as a means of alleviating the huge debt burden we face: public debt repudiation and hyperinflation. Interestingly, reform of entitlements (despite being acknowledged as driving much of the poor long-term outlook in public finances) is completely ignored.
There were other worrying parts of the paper: the hat-tips to capital controls and exit restrictions, the shrugging off that the well-being of rich people should be considered in deciding how much to tax them, a failure to outline how wealth taxes are being abandoned because they don’t work etc.
All in all, pretty ugly stuff. But the last part of the Forbes article sort of says it all:
Again, straight from the report:
“There is a surprisingly large amount of experience to draw on, as such levies were widely adopted in Europe after World War I.”
And we all know how well that worked out.