NCPA - National Center for Policy Analysis

IMF Just Loves Taxes

August 17, 2001

Critics of the International Monetary Fund pity whatever country has the misfortune to follow its advice. Despite the overwhelming success of supply-side economics, the IMF clings to the "raise taxes" prescriptions of the past.

Analysts say the fund's model for economic development is most identified with the sad outcomes in Russia, Indonesia and -- in the 1980s -- Yugoslavia. Guided by the IMF, Argentina has suffered through years of tax-rate increases and new taxes. Yet tax receipts have fallen steadily, bringing Argentina to the brink of economic collapse. And Turkey has seen its living standard halved over the past year as a result of following IMF advice.

The IMF's gravest error, critics charge, may be that it assumes tax levels don't have much effect on economic growth rates -- but the higher the tax rate, the more government revenue.

So how does the IMF view the U.S., where the vast majority of policy makers are -- to a greater or lesser degree -- supply-siders?

  • In its just-published annual review of the U.S. economy, the fund commented negatively on the size of the Bush tax cut, the safety of the dollar and the feasibility of individual retirement accounts.
  • It complimented the Clinton tax hike of 1994 and gave it -- more than entrepreneurialism and high employment -- credit for the fiscal surplus.
  • Making no allowances for the added growth that tax-rate reductions would bring, the IMF forecast that the Bush tax cut would cost the economy $2.5 trillion over 10 years.
  • In assessing the U.S. exchange rate, the fund asserted that trade deficits are dangerous and should be curtailed through cuts in consumption and a weaker dollar -- even though, as critics point out, a weak dollar would be sure to deepen the global recession.

While the U.S. is strong enough to resist such obtuse advice, the world's poorer countries often don't have that option.

Source: David Malpass (Bear Stearns & Co.), "The IMF Gets It Wrong Again," Wall Street Journal, August 17, 2001; "United States: 2001 Article IV Consultation," IMF Staff Country Report No. 01/145, International Monetary Fund, August 2001.

For IMF report

http://www.imf.org/external/pubs/ft/scr/2001/cr01145.pdf

 

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