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US Must Achieve Fiscal Policy Breakthrough: IMF

by Mike Godfrey,, Washington

19 June 2014

IMF Managing Director Christine Lagarde, launching the fund's annual Article IV consultation with the United States, said the US tax system "is too complex, has too many write-offs and loopholes, and generates too little revenue." The US should therefore focus on improving the country's tax structure and raising revenues to put government finances on a sustainable footing, she said.

The IMF's latest report said that, despite the current difficulty in finding political common ground on fiscal policy, and the consequential absence of a medium-term fiscal consolidation plan, shorter term changes in the US tax system may still be possible.

It suggested that more immediate measures could include limiting or gradually eliminating itemized deductions for the individual income tax, such as the mortgage interest deduction, and increasing the federal gas tax to shore up the Highway Trust Fund. It added that the tax system could be used more effectively to incentivize private innovation, such as by reinstating and making permanent the research and development tax credit that expired at the end of 2013. The Government should also offer time-bound tax credits or wage subsidies to employers who hire the long-term unemployed, it recommended.

However, as the IMF does not believe that US government debt "is on a sustainable longer-term path, and is likely to begin rising again by 2018," it warned that "there is a pressing need to reach political agreement on a credible and detailed medium-term fiscal consolidation plan."

Looking longer term, the IMF said that "a broad reform of corporate taxes is long overdue and should lower the marginal rate, simplify the system, eliminate a range of exclusions and deductions, and limit base erosion and profit shifting by multinational firms."

The IMF also went on to suggest that the US should implement a broad-based carbon tax, and move toward the introduction of a federal-level value added tax.

Finally, with almost 50 million Americans thought to be living in poverty, and with the official poverty rate stuck above 15 percent despite the economic recovery, the IMF pushed for an expansion of the Earned Income Tax Credit (EITC), which applies to households without children, to older workers, and to low income youth, and called for the Government to make permanent the various extensions of the EITC and improvements in the Child Tax Credit, which are due to expire in 2017.

TAGS: individuals | compliance | tax | economics | business | value added tax (VAT) | tax compliance | fiscal policy | corporation tax | tax credits | transfer pricing | carbon tax | United States | tax reform | individual income tax | research and development | Tax

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