The IMF and the Tax Consensus - new evidence

A major new report on the IMF's tax policies has just emerged from Christian Aid, looking into the IMF's tax policies. As the summary of this thoroughly researched document says:

"This paper shows that there is strong empirical support for the claim that the IMF has promoted the ‘tax consensus’ – often in spite of evidence that the implied policies are failing to meet their objectives. . . . many of the central tenets of the tax consensus are uniformly promoted by the IMF regardless of important country-specific characteristics."

Alex Cobham, then at the Oxford Council on Good Governance had an excellent article written for us in an earlier edition of Tax Justice Focus exploring this tax consensus, and noting the Four Rs of taxation. This report by Cobham (who moved to Christian Aid) deepens and broadens the analysis.

The tax consensus can be summarised as requiring that countries aim for tax neutrality and
typically for revenues of the order of 15-20 per cent. Tax neutrality, as the report explains,

"implies a shift away from direct taxation (the taxation of income and profits) and from trade taxation, and towards consumption taxation."

More specifically, the consensus has:

"• encouraged reductions in the rates of corporate and, to a lesser extent, personal
income taxation
• supported trade liberalisation (reduction of both export and import taxation)
• encouraged the introduction or expansion of sales taxes (and a value added tax,
VAT, in particular), often including an element of regional harmonisation
• emphasised, especially in recent years, the need to reduce the number of incentives
and exemptions across the tax code
• proposed significant structural overhauls to the tax administration."

The consensus is based on notions of efficiency and tax efficiency, assuming away the presence of market failures, and on an assumption that governments have plenty of tax tools to work with. It is also assumed that redistribution can be achieved through spending, not through the tax system. The report goes on to explore why the tax consensus has failed. It concludes:

Consequently, many countries are failing to realise the critical economic, social and political benefits associated with effective and inclusive taxation."

Separately, there are signs of minor potential change at the World Bank - look here.