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The current plan for US tax reform would disproportionately benefit the wealthy, the International Monetary Fund has said, recommending more support for low-income taxpayers and higher indirect taxes.
On the need for tax reform, the IMF said in its Article IV consultation for the United States that "the US personal and business tax system needs to be simpler and less distortionary, with lower tax rates and fewer exemptions." It said: "The redesign of the tax system should aim to raise labor force participation, mitigate income polarization, and support low- and middle-income households."
It added that "tax reform ought to be designed to be revenue enhancing over the medium term," and that the tax burden be shifted rather than cut, relative to gross domestic product. It said that the US should pursue tax reform that leads to lower headline rates and fewer tax reliefs, but to fund income tax cuts, the US should look to expand indirect taxes, such as introducing a federal-level consumption tax, a broad-based carbon tax, and a higher federal gas tax, it said.
"Such a move from direct to indirect taxes is likely to be positive for long-run growth," the Fund stated.
It said that a tax on the repatriation of US multinationals' funds held overseas "merits consideration but ought to be combined with a minimum tax for profits earned in low-tax jurisdictions to limit the scope of profit-shifting."
Meanwhile the IMF welcomed proposals to offer tax relief for low- and middle-income groups but said that the country should also consider expanding eligibility and relief available under the earned income tax credit.
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