International solvency is key.

Taxes and social transfers can be important tools for redistribution. Yet, despite their potential, they have not been used to the extent needed to keep pace with increasing inequality. To the extent that policy makers consider rising income inequality problematic, several policy options can be considered. The purpose of these policy options is to address increasing income inequality without adversely affecting economic growth. First, there may be a case for increasing the progressivity of the tax system. To this end, governments could ensure that tax rates on high incomes are not further reduced – an international trend highlighted in this chapter – and limit regressive tax exceptions. In certain countries there may be a case for refraining from further increase in VAT and other indirect taxes (often regressive), introduced to compensate for reductions in government revenue arising from lowered income taxes and trade tariff reductions. Second, in order to avoid the risk of harmful international tax competition, multilateral action may be needed. Indeed there are many countries that cannot enhance the progressivity of their tax system, because doing so may encourage mobile, high-income groups to leave. Of course, any efforts to curb harmful tax competition must give consideration to cases where countries have legitimately reduced taxes to improve economic efficiency. Third, tax and social policy need to support employment –a key redistribution mechanism. This means removing tax distortions that affect labour market participation.