‘Tax the rich’ is IMF’s unlikely new mantra in fight with Trump

 13 Oct 2017 - 0:03

‘Tax the rich’ is IMF’s unlikely new mantra in fight with Trump
IMF Managing Director Christine Lagarde (right) and World Bank President Jim Yong Kim, take a folder of questions from a participant at a CSO Townhall at the World Bank headquarters in Washington DC.

By Saleha Mohsin & Andrew Mayeda / Bloomberg

The International Monetary Fund spent decades telling the world’s governments how to run their economies on an American-inspired blueprint that became known as the Washington Consensus.

There wasn’t much consensus between the Fund and the White House on Wednesday, as they got embroiled in an unusually public disagreement over President Donald Trump’s tax plans.

The flashpoint was a new IMF paper arguing that developed nations can share prosperity more evenly, without sacrificing growth, by shifting the income-tax burden onto the rich. “Excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth,” it said. The study came out as Trump was hitting the road to promote the biggest overhaul of America’s tax code in decades. The Tax Policy Center, echoing most independent analysts, says it will benefit high-earners most.

As it hosts the world’s financial leaders in Washington this week, the IMF has been celebrating a global recovery that’s gathering pace after the crash of 2008. But old economic certainties -- the kind that once prevailed at such gatherings -- are proving harder to put back together, and new concerns are forcing their way onto the agenda. The Fund has been rowing back from many of the policy prescriptions it used to hand out. Meanwhile, in developed economies, voters have expressed frustration with what they perceive to be the unequally shared fruits of free trade and open borders -- most dramatically in the U.S., by electing Trump.

‘$4,000 Raise’

His administration took immediate aim at the Fund’s analysis.

A senior Treasury official disputed the conclusion that less-progressive tax rates could slow growth and make inequality worse. The official said Trump’s proposed cuts will leave the median American worker better off. The Treasury questioned the Fund’s forecasting too, suggesting the prediction for U.S. growth should have factored in Trump’s tax plans, and been higher as a result.

The president’s proposals include lower charges on corporations, and a cut in the top rate of income taxes -- though Congress will be given an option to make the wealthiest Americans pay more.

Trump said the changes will deliver a $4,000 pay raise for the typical household. In a speech outlining his tax plans in Pennsylvania late Wednesday, he said that the elimination of tax-breaks and loopholes will make it “a middle-class bill” whose benefits don’t go to the highest earners.

“I’ve had rich friends of mine come up to me and say, ‘Donald, you’re doing this tax plan, we don’t want anything’,” Trump said. “So many people have come up to me and said, ‘give it to the middle class, give it to people that need it’.”

Trump campaigned on a pledge to stand up for workers in regions hurt by globalization, and he’s argued that the lower tax rates will boost productivity, employment and wages. Democrats have dismissed such claims as trickle-down economics.

Cohn vs Bannon

But Trump’s proposals have also split the Republican coalition that helped elect him. Gary Cohn, the president’s chief economic adviser, is among the plan’s main architects. The former Goldman Sachs executive called the chance to work on tax reform with Trump a “once-in-a-lifetime opportunity.”

On the opposing wing is Steve Bannon, who helped Trump’s election campaign tap into populist unrest. He’s backed a higher rate for the rich. Bannon is gone from the White House, ousted after a few months as an adviser there, but his continued sway over the party was apparent last month when his nominee defeated a Trump-endorsed candidate in Senate primaries in Alabama.

Trump is a real-estate billionaire, and while he took the occasional pot-shot at Wall Street, inequality wasn’t central to his electoral pitch. The presidential candidate who played that note loudest was Bernie Sanders. The Vermont senator railed against the outsized influence of the wealthy, in a campaign that took the self-proclaimed socialist much closer to the Democratic nomination than pundits had expected. Sanders also took regular shots at the kind of economic orthodoxies that the IMF once routinely endorsed.

But the Fund’s thinking has changed.

‘Neoliberalism: Oversold?’

It’s suggested that capital controls have their uses. It’s acknowledged that austerity in Europe was based on assumptions about fiscal multipliers that turned out to be wrong. In a much-cited paper last year, it argued that the package of policies labeled as “neoliberalism” may have been “oversold.”

In Wednesday’s paper, the IMF said that re-directing resources for education and health-care from the rich to the poor can address gaps in social programs. On Thursday, IMF chief Christine Lagarde said that rising inequality is a threat to what she called the broadest-based economic recovery in the past decade.

The IMF’s tilt toward redistribution may ease frictions with some governments -- but not, evidently, with Trump’s. And that’s a potential problem for the Fund.

The U.S. was the driving force behind the IMF’s creation after World War II to oversee the international currency system. But Trump shows little enthusiasm for the institutions of that era, like NATO, which he sees as obsolete holdouts. On Thursday, the U.S. said it’s withdrawing from UNESCO, the UN’s cultural body, over its stance toward Israel. And the president has also railed against globalization in general. His election left many analysts wondering what was in store for the IMF.

After the tax dispute broke out, White House budget director Mick Mulvaney told the Financial Times that the Fund was among the skeptics “heavily invested” in the failure of Trump’s tax plans. And the Treasury official said the IMF and its sister institution, the World Bank, should focus on using their resources effectively.

The biggest contributor to those resources is the U.S. government.