Recent IMF Economic Report Provides New & Alternative Solutions to The “Fiscal Cliff”

A recent economic study by the International Monetary Fund (IMF), entitled “Tax Composition and Growth: A Broad Cross-Country Perspective” has received practically no attention, yet is directly relevant to the current debate. The report concludes that personal income taxes cannot be increased without affecting economic growth. However, the economists conclude that the same amount of revenue can be raised with a combination of property and sales/VAT taxes without having the same consequences.

Additional details are in this longer article. However, the bottom line is nicely summarized in this quote

Raising taxes on income while reducing consumption and property taxes, keeping the overall tax burden unchanged, is negatively associated with growth. This negative association is more significant in the case of social security contributions and personal income taxes relative to corporate income taxes. On the other hand, we find that a shift from income to property taxes has a robust and positive association with growth. Similarly, when the increase is in VAT and sale taxes compensated with a reduction in income taxes, we also find a positive effect on growth. When the sample is divided according to the countries’ income level, we find similar and consistent results for high and middle-income countries as in those of the full sample case.”

The IMF economists were not specifically writing about the current U.S. problems, and actually have a focus that is quite broader than the U.S. For this reason, the IMF report has greater independence and credibility than the majority of the politicians and political commentators that are currently getting all the press attention.

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