Lagarde: countries need smarter fiscal policies

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Let's highlight a few interesting parts of Ms. Lagarde's latest speech:

Smart fiscal policy

The challenge here is to design tax and spending measures that have minimal adverse effects on incentives to work, save, and invest. The objective must be to promote both greater equality and greater efficiency.

This means widening the tax revenue base by – for example – clamping down on tax evasion; reducing tax relief on mortgage payments from which the rich benefit most6; and reducing or removing tax relief on capital gains, stock options, and the profits of private equity investments funds, known as “carried interest”.

In many European countries, it also means reducing high labor taxes, including through cuts to employer social security contributions. This would provide a strong incentive to create more jobs and more full-time positions – which would help stem the tide of part-time and temporary jobs that have contributed to rising income inequality.

Move away from subsidies

On the expenditure side, it means expanding access to education and health care. In many emerging and developing economies, it means reducing energy subsidies – which are costly and inefficient – and using the freed-up resources for better education, training, and stronger safety nets.

According to a recent IMF study, governments around the world will subsidize the cost of oil, gas and coal to the tune of $5.3 trillion this year. This is the equivalent of what they spend on public health each year.

Promoting greater equality and efficiency also means relying more on so-called conditional cash transfers [emphasis added]. These are immensely successful anti-poverty tools that have contributed significantly to the reduction in income inequality in countries such as Brazil, Chile, and Mexico.

I would be thrilled if even a small subset of these proposals were actually implemented.

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