The International Monetary Fund said Thursday that the Federal Reserve should not cut interest rates until “late 2024” and that the government needs to raise taxes to rein in the growing federal debt, including on households earning less than $400,000 a year, as defined by President Biden.
The prescription is set out in a detailed staff report for the IMF’s annual “Article IV” U.S. economic policy review, released Thursday.
The IMF has stressed in recent weeks the need for greater fiscal prudence as the U.S. budget deficit continues to widen despite strong economic growth and Republicans and Democrats draw up tax and spending proposals ahead of the November presidential election.
IMF chief economist Pierre-Olivier Grunschas told Reuters on Tuesday that the Fed can afford to wait a little longer before starting to ease monetary policy because of the strength of the labor market.
but Staff Report To avoid further upside surprises in inflation data, they specify that the shift should occur “in the second half of 2024,” but do not specify a specific month.
The Fed’s next policy meeting is on July 30-31, with other meetings scheduled for September 17-18, November 6-7 after the election, and December 17-18.
“Given the significant upside risks to inflation that were clearly highlighted in data earlier this year, it would be prudent to lower policy rates only after the data provide clearer evidence that inflation is sustainably returning to the FOMC’s 2 percent objective.”
Raise taxes
The IMF said it projects the U.S. public debt-to-GDP ratio to be well above pre-pandemic projections over the medium term, reaching 109.5% of GDP in 2029 from 98.7% in 2020.
“Such high deficits and debt levels increase risks to the U.S. and global economies,” the IMF said, adding that it called for higher progressive taxes, including on those earning less than $400,000 a year, and the elimination of many tax breaks.
Biden has proposed raising taxes on corporations and the wealthy, but has vowed not to raise taxes on households making less than $400,000 a year.
His Republican rival, Donald Trump, has said he would preserve tax cuts passed when he was president in 2017 and could even cut taxes further for middle-income Americans and corporations.
The personal income tax cuts are set to expire at the end of 2025 and will revert to pre-2017 levels unless Congress acts to extend or adjust them.
The Congressional Budget Office estimates that extending the cuts would increase the deficit by an additional $4.6 trillion over 10 years.
The IMF, which often urges borrowers to be fiscally prudent, recommended a range of options to reduce budget deficits, including cutting some long-standing tax credits and exemptions, which it said were “ill-targeted.”
These include tax exemptions on the value of employer-sponsored health insurance plans, capital gains on the sale of a primary residence, and deductions for mortgage interest and state and local taxes. These deductions amount to about 1.4% of U.S. GDP per year.
The IMF said the United States should consider eliminating “success fee” provisions that allow investment partnership income to be taxed as low-cost capital gains income rather than ordinary income.
He added that corporate tax rates should be increased and the corporate tax system should be moved to a cash-flow tax.
The IMF also recommended raising federal excise taxes on gasoline and diesel, which have not been increased since 1993.
On the spending side, the IMF recommended linking social security benefits to the chained consumer price index and imposing a payroll tax on incomes over $250,000 per year.
