Study sheds little light on NZ tax debate

TIM HUNTER
Last updated 15:20 27/02/2014

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New research from the International Monetary Fund suggests societies with less inequality of incomes, after tax, have higher and more sustainable growth.

It also found that government actions in redistributing income - through taxes and spending - were generally not bad for growth.

Details of the study were released in a paper published this month by IMF researchers Jonathan Ostry, Andrew Berg and Charalambos Tsangarides.

In a blog, Ostry and Berg said they had used new international data to investigate the real-life relationship between inequality, growth and redistribution.

"To put it simply, we find little evidence of a 'big tradeoff' between redistribution and growth," they said.

The study found that "inequality continues to be a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells".

Furthermore, "contrary to the big tradeoff hypothesis, the overall effect of redistribution is pro-growth, with the possible exception of extremely large redistributions".

Commenting on the study, Oliver Hartwich, of the New Zealand Initiative, said the conclusions were interesting and challenging. However, they omitted some important positive aspects of income redistribution, such as education spending.

"If you severely tax the rich to pay for education for the poor you get a very different effect compared to taxing the rich to give a cash benefit," Hartwich said.

"By leaving that out they left out the most interesting story of all."

In developed countries, there was evidence that incomes of the poorly educated had not increased or even declined since the 1980s in real terms, Hartwich said.

"There is a case to be made that if you really want to tackle inequality, tackling it via education is probably the best way to do it.

"By leaving that out [of the research] I think they are leaving out one of the best policies to tackle inequality in society while also promoting growth."

The findings shed no light on the tax policy debate in New Zealand, Hartwich said.

"They say maybe you should focus on things that are negative externalities for society and tax them, rather than having higher taxation on high incomes across the board.

"I wouldn't infer too much for the tax debate."

The research found the most redistributive countries were Bangladesh, Germany, France, Holland, Britain and Australia. For these countries there was evidence that further redistribution could be bad for growth, offsetting the benefits of less inequality.

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The most unequal and least redistributive countries were Peru, Colombia, Chile, Brazil and Ecuador.

- Fairfax Media

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