IMF’s continued VAT push inconsistent with rhetoric on progressive taxes

10 December 2020

The rise of VAT. Credit: IMF Internal International Tax Rates Database.

In September, the IMF hosted the first of a series of webinars celebrating the rise of value added taxes (VAT) and the Fund’s “world-wide leading role” in spreading the use of VAT, as noted in opening remarks by Vitor Gaspar, director of the IMF’s fiscal affairs department (FAD). Reflecting long-standing civil society concerns that the IMF relies too heavily on regressive taxes like VAT without systematically measuring their distributional and gendered impacts, many questions were raised on the regressivity of VAT during the event (see Dispatch Springs 2019, Annuals 2017, briefing The IMF and Gender Equality: VAT). Yet, FAD Deputy Director Michael Keen continued to emphasise the importance of having “few or no exemptions or other special treatments…[including] on items on which the poor spend a large proportion of their income,” and maintained that expenditure measures such as targeted social protection schemes were more efficient in addressing these concerns.

The IMF’s push for the expansion of VAT has also been reflected in its lending programmes agreed in the context of Covid-19. Research by Belgium-based civil society organisation Eurodad published in October found that of 59 countries analysed, 39 made commitments to the IMF to increase the share of indirect taxes, particularly VAT, in total government revenues. In Ecuador, the IMF agreed a 27-month programme in September that required increasing the VAT rate and removing a VAT refund to the elderly. These measures were designed to raise 0.24 per cent of GDP in revenue, while modifications to the corporate income tax (CIT) in the programme sought to raise less than half of that, as reported by news outlet Bloomberg in October (see Observer Summer 2020).

IMF emphasis on VAT exacerbates broader inequality trends

These policy positions are inconsistent with the high-profile messaging by the IMF during its October annual meetings. During a town hall meeting with civil society, IMF Managing Director Kristalina Georgieva endorsed taxing capital in response to fierce criticism of the Fund’s backing of rigid fiscal consolidation measures during the Covid-19 recovery (see Dispatch Annuals 2020, Observer Autumn 2020). The Fund’s October Fiscal Monitor also emphasised financing the Covid-19 recovery through progressive taxes, including on higher bracket incomes, capital income, higher end property and wealth, while falling short of civil society demands that these efforts should start “with those directly benefitting from the crisis, such as high-frequency traders, investment funds and large digital corporations.” Responding to this discrepancy, Tove Maria Ryding of Eurodad commented, “We’re seeing a complete disconnect between what the IMF is saying when the cameras are rolling during Annual Meetings and what it is actually doing in its programmes. It is more clear than ever that the FAD is obsessed with VAT and has no shame in pushing this unquestionably regressive policy measure in the midst of an unprecedented inequality crisis that is only exacerbated by the Covid-19 pandemic. The only reason why VAT is considered ‘popular’ in these circles is because nobody is asking the opinion of those too poor to afford the most basic necessities.”

At the level of individual countries, women consistently are left further behind in terms of even being able to meet basic necessities of living, losses that are highest in countries with the most fragile economies.Kathleen Lahey, Queen's University

In 2018, UN Women published a report on gender, taxation and equality in developing countries. It found that VAT often violates the ‘ability to pay’ principle that is fundamental to tax policy and human rights law and argued against the heavy reliance on consumption taxes in developing countries. The report’s author, Kathleen Lahey, noted, “IMF longitudinal data makes it clear that between 1990 and 2017, predominantly progressive tax systems in countries at all levels of development were replaced with regressive tax systems – almost always because replacing PIT [personal income tax] and CIT revenues with VAT has been expected as part of the IMF’s own conditions. At the level of individual countries, women consistently are left further behind in terms of even being able to meet basic necessities of living, losses that are highest in countries with the most fragile economies [see figure 1].”

Figure 1. Simulated costs of new 10 per cent VAT on non-exempt basic necessities as percentage of average monthly individual incomes, by decile and gender, 2011. Source: K. Lahey, Gender Taxation and Equality in Developing Countries Issues and Policy Recommendations (NY: UNWomen, 2018).