Income inequality hinders economic growth, according to new report

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Income inequality hinders economic growth, according to new report

A new study from the International Monetary Fund finds growing evidence indicates such inequality hinders economic growth, and offers policies to address it.

Food bank recipients wait for their cart numbers to be called out to pick up their donated food on distribution day at Madrid's Tetuan food bank in Madrid, Spain on Dec. 10, 2013.REUTERS

Mar. 13, 2014, 2:38 PM EDT

By Morgan Whitaker

Skyrocketing income equality hinders economic growth, according to a new study released by the International Monetary Fund that offers a series of suggestions for how to reduce the widening wealth gap.

The report also finds that recent growth in income inequality has led to a greater appetite for wealth redistribution in both developed and developing countries around the world, especially in advanced economies hit hardest by the recent global financial crisis.

While stopping short of offering an “optimal degree of fiscal redistribution,” the new IMF report suggests nations should improve access to higher education and health care, especially for those on the lower end of the economic spectrum, and to raise retirement ages for pension systems.

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The report also notes the potential benefits of converting from regressive to more progressive tax systems, including less sales tax and income tax systems that require the wealthy to contribute a greater percentage, while noting that upper end rates above 50% could begin to discourage growth. It also suggests reducing tax breaks that generally offer greater benefit to the wealthy.

“There is growing evidence that high income inequality can be detrimental to achieving macroeconomic stability and growth. Recent empirical work finds that high levels of inequality are harmful for the pace and sustainability of growth,” the report states, noting outside research has found “rising inequality may have been an important contributing factor” in the recent crisis.

“Moreover, evidence from public surveys in various countries indicates that widening income inequality has been accompanied by growing public demand for income redistribution, especially in countries most strongly affected by the crisis,” authors note.

This new report comes on the heels of another IMF study released last month which found steep income inequality is linked closely with weak economic growth and that income redistribution does not necessarily hurt economic expansion–a surprising direction for the organization that typically gives sizable loans with austerity requirements to countries in crisis.

But the importance of tackling income inequality has become a recent focus, with IMF Managing Director Christine Lagarde describing income inequality as a “big issue” late last year.

“There is a clear indication that rising inequality leads to less sustainable growth, not to mention the social fabrics of society can be at stake. So reducing inequality, making sure that people have a job, that there is growth, that there is adequate redistribution through various systems, is important,” she said in an interview on Meet the Press in December.

Morgan Whitaker