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IMF debunks myths about wealthy and taxes

“When an organization with the IMF’s track record is calling for measures to reduce income inequality, you know income inequality has reached a level where it is harming the economy” — Larry Brown, NUPGE President

Ottawa (16 Oct, 2017) — The October 2017 edition of the International Monetary Fund’s (IMF) Fiscal Monitor debunks some of the myths spread by those opposed to making our tax system fairer.

The most important of these is that there is no link between making the wealthy pay their fair share and economic growth. Those opposing a tax increase for the wealthy claim it will harm economic growth. But as the IMF Fiscal Monitor reported, “There is no strong empirical evidence showing that progressivity has been harmful for growth.”

Tax rate for wealthiest in Canada has dropped by 23 per cent since 1981

What the Fiscal Monitor also makes clear is how far away we have moved from a tax system where what you pay is based on your income. Since 1981 the income tax rate for the highest incomes has dropped by an average of 40 per cent in advanced economies.

While the situation in Canada is not as bad as in some countries, the wealthy have still done very well out of cuts to income tax rates for higher incomes. The highest tax rate is 23 per cent lower than it was in 1981.

This is reflected in the growing concentration of wealth in the hands of the very wealthy. Canada is no exception to this trend. According to the Fiscal Monitor, in OECD countries, the richest 10 per cent hold an average of 50 per cent of the wealth. In Canada, the figure was 47.9 per cent in 2014 – and as income inequality is growing, it’s likely that figure is now higher.

Canadian tax and transfer system amongst the least fair

Income taxes and transfers, such as EI, Old Age Security, social assistance and the child tax benefit, reduce income inequality. But when tax rates on high incomes are reduced and funding for public services is cut, the impact taxes and transfers have on income inequality is reduced.

In the Fiscal Monitor's comparison of how well taxes and transfers reduced income inequality among 30 advanced economies, Canada was 28th. Only the United States and Israel were worse.

IMF concern about impact of income inequality on financial stability, not fairness

For the IMF to be calling for measures to reduce income inequality is more than a little surprising. The IMF’s focus is what it considers to be financial stability. Over the years, it has forced countries to make brutal cuts to public services and privatize public services – both measures that increase income inequality – if they want to receive help. What the information in the Fiscal Monitor reflects is the growig awarness that there is an economic, as well as human, cost to income inequality. 

“When an organization with the IMF’s track record is calling for measures to reduce income inequality, you know income inequality has reached a level where it is harming the economy,” said Larry Brown, President of the National Union of Public and General Employees (NUPGE).