IMF Worried that High Inequality Could Threaten Global Capitalism
All income growth of the past few years is going to the top 10 percent, without paying more in taxes. IMF says that higher taxation of the top earners would not impinge on economic growth, explains economist Michael Roberts
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. The International Monetary Fund, IMF, has long been associated with neoliberal policies. Nevertheless, in recent financial report by the IMF argued that increasing taxation on the rich in developed economies will not have an adverse effect on growth. This is an unusual position for the IMF, and it has already been praised by members of the British Labour Party, who wish to include a tax increase on the rich as a part of their economic platform.
During the IMF World Bank annual meetings that happened two weekends ago, the Chief of IMF, Christine Lagarde, had this to say.
CHRISTINE L.: What has not changed, though, is that the recovery is not complete. Last year, 47 countries experienced negative growth on a per capita basis, including many small and fragile economies. Far too many people across all types of economies are seeing their aspirations limited by the impact of technology and the repercussions of excessive income inequality. The result is growing political tensions in many places and increased skepticism about the benefits of globalization.
SHARMINI PERIES: Joining us today to discuss these developments is Michael Roberts. Michael is an economist in the City of London. He has been working in financial services for over 30 years. He’s the author of several books, including The Great Recession and The Long Depression. Good to have you back with us, Michael.
MICHAEL ROBERTS: Hi, Sharmini. How are you?
SHARMINI PERIES: Good. Michael, the IMF regularly publishes its Finance Monitor. Why is this most recent report that they have published, as well as what we just heard Christine Lagarde articulating, which is that neoliberalism isn’t all that it’s cut out to be, there may be some issues, like creating inequality in the world, give us a sense of where the World Bank is going with this.
MICHAEL ROBERTS: I think the IMF, and that clip shows it, is worried that the huge increase in inequality of income and wealth in many countries, like the US and the UK, over the last 20 or 30 years is reaching such extreme levels that there is serious danger of social and political unrest. The great status quo of globalization and neoliberal policies and international activity in the direction of big business is being threatened by this high inequality. Their economists have now started to switch round and have found evidence to show that it doesn’t really make a lot of difference to growth if big corporations and CEOs at the top of big companies who are earning fat salaries are taxed more in order to redistribute income effectively to those people who need it more and can be more productive.
In fact, their evidence shows that a higher rate of marginal tax has little or no effect on growth, and you could raise it from the levels which, Donald Trump’s talking about knocking it down to God knows where, 15% or lower. Well, the marginal rate according to the IMF economists in their latest report could be as high as 60% or 70% and it would make little difference to growth, but it will make a significant difference to improving the redistribution of income.
SHARMINI PERIES: Give us a sense of why the UK Labour Party has embraced this statement by the World Bank in terms of taxing the rich.
MICHAEL ROBERTS: I think obviously the Labour Party with its new rather left-wing leadership is really concerned to bring home the fact to people that a very small minority of the 1%, as often talked about, have been sucking up all the income growth that we’ve seen over the last 10 or 15 years, and they’re not really paying any extra tax on it. In fact, the average tax, if you take into account income tax, sales tax, payroll tax, all the other taxes that every household has, then the average take by tax in the UK for the lower income people is higher than the share paid by the top 1%.
That redistribution is so unfair, they see no reason why we couldn’t raise the income tax at the top end. For people who are earning something like $200,000 or $300,000 a year or more, they should be taxed more. It would certainly help to bring in some more tax revenue income to be distributed for welfare and other benefits, and it wouldn’t damage growth. The IMF report tends to support the view of the Labour leadership that they can do this without changing the course of improvement in the economy in general.
SHARMINI PERIES: Explain this a little bit more. Following the massive tax cut on, well, let’s say during the Bush administration we had, between 2001 and 2003, growth in the US did not pick up. Explain what is the argument that taxation of the rich can prevent or slow growth, and why has the IMF rejected this argument?
MICHAEL ROBERTS: In the old days, the argument used to be what was called a trickle down economics, namely, as long as the rich have plenty of money, they would spend it, they would invest and then people would get jobs, and that that was the way to work an economy, and that any attempt to reduce the wealth and the incomes of the very, very rich, we’re talking about the very, very rich, Sharmini, not the average person would damage the economy.
That argument, that was an old neoliberal argument, the trickle down economics, is time and time again proved to be wrong with the empirical evidence and in the results of what happens in economies. It’s worth remembering that in the 1950s under President Eisenhower, hardly a left wing president, the marginal rate of tax in the US for the very, very top was 90%, and yet during the ’50s and ’60s growth in the American economy has never been faster. We’ve never seen that level of growth again when the marginal rate of income tax was 90%.
What really damages the economy is not so much high income tax after people have earned it and worked. It’s things like payroll tax, reducing the ability of small companies to employ people because their taxes are very high, squeezing workers on payroll taxes very severely when the top don’t really pay much payroll tax, very large sales taxes. All those things are very regressive in terms of the lower income groups. It’s those sort of taxes that are damaging rather than high income tax or a high corporate tax, which will bring in proper revenues to be redistributed.
SHARMINI PERIES: Then, Robert, the bestselling book by Thomas Piketty, Capital in the 21st Century, draws a connection between taxation of capital and debt. The debt of one person is the asset of another. The IMF is a mechanism for managing debt of the global South as an asset for the global North. How does taxation of the rich play into this? Is this not actually a policy which could undermine the most basic policies of the IMF in terms of that it offers emergency loans in exchange for economic reform, like that in Greece?
MICHAEL ROBERTS: Yes. I think there are a number of questions there you’ve raised, Sharmini. First of all, I think your viewers should be aware, even though we can bring about a redistribution perhaps with a more progressive income tax system, so that the more you have, the more you pay, that’s what we mean by a progressive income tax system, the real crucial question is the power of big business and capital and the huge profits made by business and how they’re controlled, and all the tax havens that big companies put their money in to avoid tax and sometimes to evade it illegally in international tax havens in various parts to world. We’ve heard about the so-called Panama Papers, where lots of rich individuals have been hiding their cash and their assets in places like Panama, using accountants and others. All that is a massive loss of revenue to the government, and therefore an opportunity to improve conditions by people paying their way, companies paying their way.
What then happens is that when governments don’t have enough revenue because of this tax hoarding and evasion, they’re forced to borrow, so their debts rise. That’s what happened in countries like Greece, where their tax revenues were low. Businesses and companies were hiding their revenue so they didn’t pay tax. There was a big increase in borrowing by the Greek government, mainly from French and German banks, and they got themselves into difficulty when there was that eurozone crisis in about 2010 onwards.
That’s what happens. When governments are squeezed of their revenues that they should be entitled to to help the population as a whole, they’re forced to raise borrowing. That increases their debt, but also increases their costs because they have to pay interest on that. And they’re usually borrowing from the people who are actually evading tax. We have this system that exists at the moment of big business avoiding tax and governments not getting the revenues that they need, and people like you or me paying a lot more on payroll tax and sales tax that we otherwise wouldn’t need to do.
SHARMINI PERIES: In a place like Greece, unlike that of, say, the Central Bank of Europe or the Treasury here in the US, they’re not able to print money to make up for their debt. They actually have to borrow and pay enormous amount of interest in order to keep their countries running.
MICHAEL ROBERTS: Yeah. It’s often argued that we could avoid, if central banks just keep printing money to give to the government, then their problems are solved. But of course that would not be the case because eventually even that has to be recouped in some way by the productive power of an economy. You can’t create money out of nothing indefinitely. Otherwise, the value of that money will drop very sharply and people will no longer trust it if you just print it.
If I told you tomorrow that I’ve got an extra million, and you’d say, “Where do you get that extra million dollars from?” “I just do it. I have it in my bank. I printed it.” “Oh.” You wouldn’t believe me that I was capable of actually delivering that million again and again and again unless I could actually produce the work and the effort and the revenues that come from selling something or producing something to deliver that. You can’t go on as an economy just printing money. It’s only a short-term measure.
The real problem and crisis for Greece and others, and in Europe, was that the capitalist economies around the world collapsed in 2009. Greece, which had been living off borrowing, was the weakest and suffered the most, but it was the collapse that really brought things down, not just the fact that they were borrowing. That borrowing was a result of the fact that they couldn’t deliver in the end when the economies collapsed. That’s the real issue that viewers must remember, that what matters is growth and reasonable growth and a progressive development of all the resources in education, health, and elsewhere to improve an economy so that we can meet all the things that we want to do through the taxation system.
SHARMINI PERIES: Now that we understand this a little bit better, Michael, do you think that the IMF is actually convinced by this, and are they going to change the way in which it behaves in terms of Southern economies and loans and the requirements that they attach to these loans moving forward?
MICHAEL ROBERTS: No, they’re not. They are one of the things that, Greece still owes the IMF a lot of money, billions, for example, Greece, but other countries too, and the IMF is absolutely insistent on getting every penny of that money back with interest over a period of time. That means that the first people that have to be paid are the IMF. If you borrow from the IMF, like the Greeks or anybody else, then you find that you have a hard taskmaster who wants that money back, and there’s no way round it.
Greece found that it borrowed money from the IMF, from a European financial institution, and that money, those loans, have to be paid first, and the result is they have nothing much left to spend on improving the conditions of their people. Pensions are cut. Services are cut. Taxes are increased. All to pay back the IMF, and the European financial institutions as well. When you’re in that position, you are facing a very heavy taskmaster. The IMF is not changing its attitude on that.
SHARMINI PERIES: All right, Michael. I thank you so much for joining us today, and I look forward to having you back, hopefully next week where we’re expecting a changing of the guard at the Fed in Washington because President Trump is expected to make an announcement as to who his choice or his pick might be or who he’s tapping for the Federal Reserve here. Thank you so much for joining us.
MICHAEL ROBERTS: Thank you.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.