Skip to main content

Something must be done about rising income inequality, says the International Monetary Fund, and the solution is redistributive taxation. You read that right – the IMF in Washington, the same people who dole out free-market medicine and put fiscal hairshirts on insolvent governments. Their latest idea, announced yesterday by the Fund's deputy managing director, David Lipton, sits oddly with the Fund's reputation as global capitalism's establishment club. But if the IMF is beginning to focus on statistics about wealth disparity rather than good old GDP, it is because the figures look alarming and, more importantly, because governments – the Fund's members – now fear political conflict and social unrest.

Inequality is rising in the mature economies and in Asia, says the IMF, referring to the Gini coefficient, which equates perfect equality to a zero score and absolute inequality to 1. Over the last several decades the trend has been towards greater equality in Sub-Saharan Africa and Latin America, mainly due to redistributive efforts in Brazil and South Africa. But what is striking is the huge gap between levels of inequality in the developed world, which has a Gini score of about 0.3, and the emerging world which is stuck at levels of 0.4 and 0.5.

The IMF is worried that high ratios of inequality hinder economic growth because too many people are stuck on the bottom rung without skills in a slough of ignorance and bereft of opportunity. The Fund reckons that cleverly-designed redistributive taxation can redress the balance and improve the lot of the poorest, without discouraging wealth-creators. Examples include the Brazilian initiative (bolsa familial) to support families in exchange for school attendance, but what is worrying is the way in which wealth is being rapidly accumulated at the top, even during periods of weak economic growth.

It is perhaps not entirely an accident that the IMF under the leadership of Christine Lagarde is taking this stance just as Capital in the 21st Century is being published in English translation. It's a history of capital and wealth by the French economic historian, Thomas Piketty, which takes up the baton dropped by Karl Marx in the 19th century. In the book, Mr. Piketty seeks to explain how capitalism can thrive while producing low rates of growth in the economy and increasingly unequal rewards.

One of Mr. Piketty's more interesting observations is that for most societies throughout modern history, average economic growth rates are quite low, in the region of 1 to 2 per cent. In the 20th century, war and financial collapse provoked much faster catch-up growth of two or three times the long-run rate, a phenomenon that reduced rates of inequality because incomes were rising quickly. Meanhwile, financial crises reduced the rates of return, thus curbing wealth accumulation by the rich. The recent post-Second World War boom has encouraged us to expect high levels of economic and population growth, but Mr. Piketty reckons that we may be falling back to a long-term trend of slow growth and high rates of return. Population expansion is on the decline everywhere, deflation is threatened in the mature economies but financial returns are quite high and, says Mr. Piketty, Marx was quite wrong when he predicted that high returns on capital were not sustainable.

The French historian reckons that in the United States, the disparity of wealth between richest and poorest has reached levels not seen since before the First World War. In a recent New York Times interview he commented,"History suggests that this kind of inequality level is not only useless for growth, it can also lead to a capture of the political process by a tiny high-income and high-wealth elite. This directly threatens our democratic institutions and values."

Which brings us back to the IMF and its prescription of redistributive tax medicine. The question is whether or not it would be wise to impose a levy on the assets of Bill, Larry and Sergey if we are not to find ourselves ruled by Microsoft and Google in some dystopian, Blade Runner-type future. Mr. Piketty favours a progressive global wealth tax, an idea which is as beguiling as it is ridiculous, given the impossibility of achieving agreement for such a measure.

The alternative would seem to be aggressive imposition of minimum wages, hated by small businesses and thought to be anti-social in their tendency to reduce levels of employment. While Mr. Piketty's universal levy on capital is fanciful, he is correct in identifying the hoarding of wealth (capital) as problematic. What we need is faster recycling of capital, such that hoarding by elites and the transfer of wealth through families does not hinder access to capital among less privileged social groups. In a static world of lowish growth, we need fewer obstacles in access to capital; more competition, not less.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
MSFT-Q
Microsoft Corp
-0.17%420.72

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe