The IMF Disagrees With Zero Hedge

Zero Hedge – by Tyler Durden

On Thursday, after we presented an article by Simon Black in which the author suggested that the IMF was implicitly proposing a 71% tax-rate on Americans, by “suggesting that the US government could maximize its tax revenue by increasing tax brackets to as high as 71%”, the IMF took offense to this characterization, and tweeted out the following:  

Naturally, the IMF has a right to its opinion, be it retroactive revisionism, or proactive humorous predictions about the future, which incidentally we have charted in the past showing just how “accurate” the IMF’s forecasting track record has been in recent years…

… but since the topic of taxation, be it on wealth (something we warned about in September 2011, which as depositors in Cyprus banks learned about the hard way in March of this year), or income, is far less humorous, we leave it up to readers to decide just what the IMF is “proposing”, using only the IMF’s own words.

Below we present the key passage from the IMF’s October 2013 Fiscal Monitor report titled “Taxing Times.”

Whether those with the highest incomes could or should pay more has become a contentious political issue in many countries. Several, given large consolidation needs, have bucked the decades-long trend by increasing top personal income tax rates quite substantially: since 2008, Greece, Iceland, Ireland, Portugal, Spain, and the United Kingdom have all done so, on average by more than 8 percentage points.

Assessing whether there is untapped revenue potential at the top of the income distribution requires comparing today’s top marginal income tax rate with the marginal tax rate that would maximize the amount of tax paid by top income earners. The latter depends on two things: first, how responsive their taxable income is to that marginal rate—which in turn depends on both “real” decisions (on labor supply efforts and the like) and “paper” avoidance activities; and second, the distribution of income within that upper group. Ranges of revenue-maximizing top income tax rates can be calculated by combining existing estimates of the elasticity of taxable income with the data on income distribution used above. The average is about 60 percent. In several cases, current top marginal rates are toward the lower end of the range (Figure 17),implying that it might indeed be possible to raise more from those with the highest incomes.

How much more? The implied revenue gain if top rates on only the top 1 percent were returned to their levels in the 1980s averages about 0.20 percent of GDP (Figure 18), but the gain could in some cases, such as that of the United States, be more significant. This would not make much of a dent in aggregate inequality, for which, if that is the objective, more dramatic change would be needed.

Figure 17:

Furthermore, here is additional commentary from the WSJ dated December 3, 2013 with “The Coming Global Wealth Tax“, preceding our article if picking up where we left off in September 2011, and curiously a piece the IMF had no problems with:

What the IMF calls “revenue-maximizing top income tax rates” may be a good indication of how much further those rates could rise: As the IMF calculates, the average revenue-maximizing rate for the main Organization of Economic Cooperation and Development countries is around 60%, way above existing levels.

For the U.S., it is 56% to 71%—far more than the current 45% paid in federal, state and local taxes by those in the top tax bracket. The IMF singles out the U.S. as the country where raising top rates toward 70% (where they were before the Reagan tax cuts) would yield the most revenue—around 1.25% of GDP. And with a chilling candor, the IMF admits that its revenue-maximizing approach takes no account of the well-being of top earners (or their businesses).

Of course these measures won’t return the world’s top economies to sustainable levels of debt. That could be achieved only through significant economic growth (the good way) or, as the IMF puts it, “by repudiating public debt or inflating it away” (the bad way). In October the IMF floated a bold idea that didn’t get the attention it deserved: lowering sovereign debt levels through a one-off tax on private wealth.

As applied to the euro zone, the IMF claims that a 10% levy on households’ positive net worth would bring public debt levels back to pre-financial crisis levels. Such a tax sounds crazy, but recall what happened in euro-zone country Cyprus this year: Holders of bank accounts larger than 100,000 euros had to incur losses of up to 100% on their savings above that threshold, in order to “bail-in” the bankrupt Mediterranean state. Japanese households, sitting on one of the world’s largest pools of savings, have particular reason to worry about their assets: At 240% of GDP, their country’s public debt ratio is more than twice that of Cyprus when it defaulted.

From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.

Indeed, here is the IMF on the prospect of a “one-off” financial asset tax:

A One-Off Capital Levy?

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair). There have been illustrious supporters, including Pigou, Ricardo, Schumpeter, and—until he changed his mind—Keynes. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away (these, in turn, are a particular form of wealth tax—on bondholders—that also falls on nonresidents).

There is a surprisingly large amount of experience to draw on, as such levies were widely adopted in Europe after World War I and in Germany and Japan after World War II. Reviewed in Eichengreen (1990), this experience suggests that more notable than any loss of credibility was a simple failure to achieve debt reduction, largely because the delay in introduction gave space for extensive avoidance and capital flight—in turn spurring inflation.

The tax rates needed to bring down public debt to precrisis levels, moreover, are sizable: 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

… which promptly resulted in this “IMF Statement on Taxation” clarification.

So is Zero Hedge wrong as the IMF broadly trumpets? We’ll let readers decide. However, we just wanted to set the record straight – after all the last thing we want is for the IMF to admit it is wrong once again as it did in early 2013 with the whole “fiscal multipliers” fiasco (about which incidentally the IMF would be absolutely correct if instead of “austerity” the IMF were to use the proper term in its calculations: “corruption, gross government incompetence and epic capital misallocation“).

8 thoughts on “The IMF Disagrees With Zero Hedge

  1. The US could simply ‘coin’ it’s own money per the Constitution (article 1 chpt 8) at zero percent interest. This would not only give the US a stable currency it would afford for economic growth. Judging by the past, American economic growth is far removed from the goals of Congress which seems far more content with their personal prosperity no matter the repercussions the nation must endure.

    Yes, economic growth, the key to solvency.

    The laws generated over the past decade have been murdering businesses. Smaller they are the quicker they have fallen. Resulting from sheer ignorance of free market & capitalistic proofs to cronyism (greed), corrupted by the bundles of money thrown at lobby groups (to be directed at legislators in a manor most likely to get the money pushers desired results – buying legislation) or some combination of each.

    Crippling legislation has destroyed the workforce of America by design & ignorance both. To remove and/or reverse many hostile (often selective to progress agendas of asinine liberal fantasy or direct & specific corporate gain) laws would only serve to bolster the US workforce generating many positive results for Americans from employment through increased business revenues generating more money for the citizenry & corporations leading to increased gov intake through existing taxation resulting in a much more stable & robust economy. Restoring faith in America would help the citizens and draw others to invest in the prosperous American economic situation that has been revitalized and allowed to climb from the grave it was shoved into by failed liberal ideals.

    However nice an idea this may be it will never work if the same usurpers of American prosperity remain in any position where they can continue to degrade & destroy, by intent or through ignorance, the pillars this once great nation was founded upon

    1. “Crippling legislation has destroyed the workforce of America by design & ignorance both.”

      Actually, outsourcing most of our jobs and industries overseas has destroyed the American workforce.

      By design.

      1. Yes, their methodology varies yet we clearly know the end results; we live them daily.

        When the (example) EPA creates law (listed as regulations of course) about the acceptable (ie: legal) amounts of xyz released into the environment leaving said business the option of shuttering for newly mandated updated (often cited as ‘retrofitting’) or outsourcing the businessman will make an economical decision. The cost of outsourcing is nearly always more cost efficient than keeping current with the ever increasing (usually arbitrarily made or for another group or persons gain – not the ‘peoples’ gain of course, be it health or finical benefit) regulations from the Gov.

        You can certainly think of plenty examples. If not, just ask…

        1. As I said, they deliberately outsourced the majority of jobs and industry in this country with the explicit intent of destroying our economy, and enriching China, Taiwan, India, etc., in the process.

          Do you disagree?

  2. Tyler Durgen is one of the most respected bloggers on the net. The IMF can kiss my ass……

    I would never trust anything the comies over at the IMF tweets.

    1. Yes, I got too involved with my initial diatribe to mention that as well; Durden routinely kicking ass.

      Frequently I spend more time correcting my spelling (and sheer typo nonsense) errors than I do on writing the content.

      Every sense they popped my lid and lobed off part of my brain I transpose a lot of letters. Added bonus – my memory is much worse now too. Fortunately I can still spot tyranny a mile away & when I fail my friends at FTT are sure to assist.

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