The International Monetary Fund Weighs in on the Effects of Economic Inequality

The IMF just released a report titled Causes and Consequences of Income Inequality: A Global Perspective. It looks at the effects of trickle-down economics. One conclusion of the 150-country IMF study is:

“Policies that favour the wealthy in the hope that money will trickle down through the economy do not produce greater growth while boosting incomes of the poor does expand the economy.”

Trickle-down economics has failed to produce economic growth, according to the report.

“‘If the income share of the top 20 per cent [the rich] increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down,'” the report reads.

The authors calculated that for every percentage point increase in income share by the richest quintile in any given country studied, GDP growth was 0.08 percentage points lower in the following five years than it would otherwise have been.

Conversely, if the income of the poorest quintile increases by one percentage point, the country’s economy expands by a little over a third of a percentage point in the ensuing half-decade.”

Among the report’s recommendations are education funding and tax restructuring.

“Policies that favour those higher up the economic ladder “can lead to under-investment in education as poor children end up in lower-quality schools and are less able to go on to college,” the report says. “As a result, labour productivity could be lower than it would have been in a more equitable world.”

The report also suggests wholesale changes to the way developed economies tax their citizens, moving away from regressive income taxes and toward a more progressive system built on wealth and property taxes, and a crackdown on tax avoidance and evasion.”

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