IMF tax reform message: Poorly designed systems weaken investment and growth

The International Monetary Fund (IMF) has stated that poorly designed tax systems create significant costs for economies, sending the message that reforms reducing tax-induced distortions can support investment and growth.

The IMF shared the chapter titled "Better Taxation for Growth" from its Fiscal Monitor report, which is set to be published on October 14. The report emphasizes that for governments, it is critical not only how much tax revenue is collected, but also the methods used to collect that revenue, as this is vital for economic performance.

According to the report, public finances in many countries are facing serious pressures. Therefore, tax systems must provide the necessary revenue for budget sustainability without creating obstructive effects on private investment, innovation, and employment.

Emphasis on VAT and Corporate Tax

The IMF reported that factors such as VAT exemptions and companies not registering for the VAT system can increase input costs for companies by up to 9 percent in emerging markets and developing economies.

The report stated that typical corporate tax practices can also raise the cost of capital by an average of 15 to 20 percent due to reasons such as the inability to fully deduct investment costs for tax purposes, and that this situation can have a deterrent effect on investments.

It was noted that poorly designed taxes on employment income can weaken individuals' incentives to participate in the labor force and earn more income. The IMF emphasized that better tax administration is also one of the fundamental elements of better taxation.

The IMF also shared the chapter titled "Intangible but Real: The Spillovers of Corporate Taxation" from its World Economic Outlook report, which is set to be published on October 13. This chapter states that tax competition continues to have an impact on the global economy, but its nature is changing.

The report noted that reforms aimed at preventing large-scale tax avoidance have limited competitive pressures in some areas; however, corporate tax competition continues among economies with similar levels of development. According to the IMF, the repositioning of profits and investments by multinational corporations across countries continues to create cross-border spillover effects.