Tax justice is good for growth: IMF

We recently briefly blogged an IMF report describing how economic inequality leads to slower economic growth.

Now, in the Financial Times, a fascinating comment article by the IMF Deputy Research Director Jonathan Ostry, whose subtitle is “A more redistributive tax system appears to lead to higher growth.”

It’s a big study, and it has two striking results. First, the link between inequality and growth:

“More unequal societies have slower and more fragile economic growth. It would thus be a mistake to imagine that we can focus on economic growth and let inequality take care of itself. Importantly, we established that growth is faster in more equal societies than in less equal ones, regardless of whether they have highly redistributive tax systems.”

Second, on the link between redistributive tax systems and growth, they found little evidence that a modestly redistributive tax system hurts growth. They saw ‘some signs’ that highly redistributive systems “may crimp economic performance.” As the underlying IMF report says:

“Redistribution appears generally benign in terms of its impact on growth; only in
extreme cases is there some evidence that it may have direct negative effects on growth.”

Putting these two together, and the result is:

“Making the tax system modestly more redistributive seems to have little direct effect on growth. Over time, however, it will result in a more equal distribution of income – and that, in turn, seems to lead to higher growth.”

And now, for something altogether scarier requiring attention to tax justice: read this.