IMF Urges Jurisdictions to Reduce Distortive Tax Policies
JAKARTA, DDTCNews - The International Monetary Fund (IMF), through its October 2026 edition of the Fiscal Monitor, is urging jurisdictions to reduce the distortions that tax policy imposes on the economy.
In a chapter entitled Taxing Better to Boost Growth, the IMF emphasises that the way governments collect revenue is just as important as the amount of revenue collected.
Two different tax systems can generate equivalent revenue whilst having vastly different impacts on productivity, investment, and employment. Jurisdictions therefore need to design policies that minimise distortions.
"Taxing better means addressing these distortions and improving efficiency, that is, raising the same amount of revenue with the same tax mix, but with less interference in real economic decisions," the IMF wrote, as quoted on Monday (12/10/2026).
Several distortive tax policies need to be reformed to promote economic growth. First, distortions in production activities arising from businesses' inability to credit input VAT that has already been paid.
Because input VAT is non-creditable, a value added tax (VAT), which should be neutral and not add to input costs, effectively becomes a tax on production activities. "VAT that is not fully credited on business inputs quietly becomes a tax on production, raising costs that cascade through supply chains," the IMF stated.
Research conducted by the IMF indicates that eliminating distortions in production activities arising from the VAT system would yield welfare gains of up to 0.8 percent of GDP.
Second, jurisdictions also need to minimise distortions in investment activities caused by the prevailing corporate income tax rules. Corporate income tax has long contributed to an increase in the costs of capital and influences companies' decisions regarding investment.
To minimise the distortions affecting investment decisions, the IMF is encouraging jurisdictions to adopt a corporate income tax system that allows companies to immediately deduct investment costs (immediate expensing).
The IMF estimates that eliminating distortions in investment activities would increase long-term capital stock by 6.4% in advanced economies and 8.2% in low-income developing countries, whilst also driving long-term GDP growth of between 2.1% and 2.7%.
Third, jurisdictions need to implement tax policies that do not distort individuals' decisions to participate in the workforce. According to the IMF, tax policy should not weaken people’s incentives to enter the workforce.
Improvements to tax policy that strengthen incentives for individuals to enter the workforce would increase employment rates by 1.2 percentage points in emerging market and developing economies and 0.8 percentage points in advanced economies.
In addition to the 3 reforms above, the IMF is also encouraging jurisdictions to strengthen the implementation of well-designed tax policies. A sound tax design will not produce optimal outcomes if taxpayers are burdened by excessive compliance obligations and unpredictable administration.
"Better tax implementation can support growth by expanding fiscal space for productive public spending, reducing pressure to rely on more distortionary taxes," the IMF stated. (dik)