US: IMF report looks at fiscal position

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The IMF has published a Concluding Statement following the conclusion of consultations under Article IV of the IMF’s articles of agreement. The report sets out the preliminary findings of the IMF staff.

The report notes that the US economy is in a long period of growth and appears to be close to full employment, but there are potential problems in the medium term arising from rising public debt and a moderately overvalued dollar. The current account deficit is projected to be around 3% of GDP in the medium term and the net international investment position has deteriorated in recent years. Growth since the financial crisis has been too low and unequal, income growth not being shared broadly.

The administration’s budget contains proposals to reduce the fiscal deficit and debt and revamp the tax system. Detail is still to be considered and for this reason the IMF’s macroeconomic forecast uses an assumption of unchanged policies. Growth is expected to rise above 2% in 2017 but subsequently to return to the underlying potential growth rate of 1.8%.

The administration and the IMF agreed that reforms will need to include a more efficient tax system, improved education, a more effective regulatory system and reform to the immigration and welfare systems.

The budget in its present form would cut discretionary spending and place a disproportionate share of the adjustment burden on low and middle income households. The IMF suggests that an alternative approach could involve a tax reform to simplify the tax system, improve efficiency and increase the federal revenue-GDP ratio. There should be more balanced expenditure restraint; measures to reform the social security system; and action to contain healthcare cost inflation through technological solutions to increase efficiency.

The IMF notes that there is broad agreement on the objectives of a tax reform. The reform would simplify the tax system, lower the marginal tax rates, scale back tax preferences, provide an incentive for labor force participation, ease income polarization and support low and middle income households. The reform should be designed to enhance tax revenue over time.

The IMF suggests that as part of a tax reform the corporate income tax could move to a rent tax, in the form of a cashflow tax or an allowance for corporate capital tax, with a lower marginal rate. This would incentivize investment and reduce the bias towards debt finance. It could also involve elimination of corporate tax preferences to make the tax system more efficient. The IMF notes that these changes would have significant domestic effects and international spillovers.

Other tax reform measures suggested in the IMF report are:

  • A one-time tax on the unrepatriated profits of multinational enterprises, as already proposed by the US administration. The profits could be taxed at a rate modestly lower than the current corporate tax rate. Payment of the liability could be spread over several years to alleviate liquidity concerns of the multinationals.
  • Transitioning to a territorial system, as proposed by the administration, could be considered but would need to be combined with a minimum tax for profits earned in low tax jurisdictions so the chance for profit shifting is reduced.
  • Income tax relief could be provided to low and middle income groups, as proposed by the administration, and most itemized tax deductions could be scrapped in combination with an increase in the standard deduction. The eligibility for and size of the earned income tax credit could be increased to support low income households and as an incentive to work.
  • Any tax rate reductions for pass-through entities should tax revenue implications into account as it could create an incentive for some firms to become pass-throughs and for some employees to become independent contractors.

To increase tax revenue the US could rely more on other sources including a federal level consumption tax, a broad based carbon tax and a higher federal gas tax.


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