Tax Policy and Economic Growth: Five IMF Takeaways

Tax systems generating comparable levels of government revenue can have very different effects on production, investment and employment. In its October 2026 Fiscal Monitor, the IMF examines which changes to tax rules can support economic growth.

🔹 1. VAT exemptions can increase business costs

When a company’s sales are exempt from VAT, it may lose the right to deduct VAT paid to suppliers. As a result, the tax becomes part of production costs and may lead to higher prices.

The IMF recommends reviewing such exemptions and ensuring the timely crediting and refunding of VAT.

🔹 2. Investment can be supported without lowering tax rates

Businesses benefit when they can deduct the cost of new equipment more quickly when calculating corporate income tax. This reduces tax payments during the first years following an investment.

Accelerated depreciation or the immediate deduction of investment expenses can make investment in production more attractive.

🔹 3. Taxes and benefits should encourage formal employment

When a person enters formal employment, they may simultaneously begin paying taxes and contributions while losing part of their social benefits. If the increase in disposable income is small, the incentive to work formally weakens.

Tax rules and social support should therefore be coordinated, avoiding sharp reductions in benefits when wages rise only slightly.

🔹 4. Tax incentives should promote research and business development

The IMF favours incentives for research and development expenditure over preferential taxation of profits generated by technologies that have already been developed. Support should be evaluated according to the amount of additional research it generates.

Incentives for small businesses also require careful design. A sharp increase in the tax burden once a turnover threshold is exceeded may discourage business growth and create incentives to split business activities.

🔹 5. Effective administration improves tax collection

Complex reporting requirements, ambiguous rules and lengthy VAT refund procedures increase business costs. This burden is especially significant for small and young companies.

Simple procedures, user-friendly digital services, timely tax refunds and risk-based audits can reduce business costs and improve revenue collection without increasing tax rates.

💡 Key takeaway: tax reforms should create favourable conditions for production, investment and formal employment. Their impact on government revenue should be assessed comprehensively, taking the entire package of measures into account.

📎 Source: IMF, Fiscal Monitor, October 2026 — Taxing Better to Boost Growth.