IMF warns that an economic crisis in China could make the world go back into recession
The IMF said tax systems in rich countries had become less progressive over recent decades Reuters

The International Monetary Fund has advised developed economies to raise taxes on the rich in order to reduce inequality.

In a report released on 11 October, the IMF said there was no evidence to suggest that raising taxes on high-earners would adversely impact on economic performance.

It also called for increased taxation of capital income, which is often taxed at a lower rate than labour income, to protect the overall progressivity of the tax system.

Wealth inequality has been steadily widening in some advanced economies such as the UK and US at a time when global inequality is falling due to strong income growth in countries such as China and India.

The IMF said tax systems and government spending in developed economies have become less progressive in recent decades and, as a consequence, less effective at distributing wealth fairly through the population.

It noted that the top income tax rates in rich countries fell from an average of 62% in 1981 to 35% in 2015.

"Our empirical results suggest that it is possible to increase the degree of tax progressivity while preserving growth, at least for levels of progressivity that are not excessive," said Vitor Gaspar, director of the fiscal affairs department at the IMF.

"Developing tax capacity is critical for increasing the distributive role of fiscal policy while ensuring fiscal sustainability."

The IMF's report comes days after US President Donald Trump unveiled his tax reform plans, which critics say is a giveaway to the highest earners.

The Washington-based lender's recommendations were welcomed by shadow chancellor John McDonnell, whose Labour party has proposed a 50% tax on the highest earners.

"There is no evidence to support those who scaremonger about the effects of making the rich pay fairer taxes," he said.

"Instead of engaging in infighting in his own party the chancellor should listen to Labour's calls for fairer taxes and increased investment to build an economy for the many not the few."