The IMF (International Monetary Fund) has proposed to the G-20 (Group of Twenty) leading advanced and emerging countries of the world, that banks should pay two taxes: a bank levy - initially at a flat-rate - on a balance sheet value and also a further tax on profits and pay, to fund future bailouts.
In a report circulated Tuesday ahead of this week’s meeting of the G-20 finance ministers (pdf), and leaked to the BCC, the Fund outlined two taxes that the group should consider and warned that international harmonisation would be critical to avoid regulatory arbitrage.
The report says while the net fiscal cost of government interventions in support of the financial system may prove relatively modest, this greatly understates the fiscal exposures during the crisis. Net of amounts recovered so far, the fiscal cost of direct support has averaged 2.7 per cent of GDP (gross national product) for advanced G-20 countries. In those most affected, however, unrecovered costs are on the order of 4–5 per cent of GDP. Amounts pledged, including guarantees and other contingent liabilities, averaged 25 per cent of GDP during the crisis. Furthermore, reflecting to a large extent the effect of the crisis, government debt in advanced G-20 countries is projected to rise by almost 40 per centage points of GDP during 2008–2015.
The IMF proposed that the G-20 countries begin first with a flat tax, a "financial stability contribution," on all institutions for simplicity, but that the rate could then be adjusted to reflect risk. The money raised could be sequestered in a special rescue fund or be added to each country’s general revenue, the report said.
If additional taxation is desired, the Fund recommended a “financial activities tax” on profits above “normal” levels as well as high pay.
“These are important proposals and we welcome them,”said Alistair Darling, UK chancellor. “The recognition that banks should make a contribution to the society in which they operate is right. Any agreement has to be international and that unilateral attempts would simply risk being undermined.”
Insurers, hedge funds and other financial institutions must also pay the taxes, the IMF argues, despite them being less implicated in the recent crisis. If they were not included, activities currently carried out by banks would be reclassified as, for example, insurance or hedge-fund services to escape the levies.
British Prime Minister Gordon Brown last year proposed a so-called "Tobin Tax" - - in 1978, the late James Tobin, Yale economist and Nobel laureate, first proposed the idea of a tax on foreign exchange transactions that would be applied uniformly by all major countries. A tiny amount (less than 0.5%) would be levied on all foreign currency exchange transactions to deter speculation on currency fluctuations - - on financial transactions. Some countries, including Canada, oppose any new bank taxes.
The UK has introduced a levy on bank bonuses; President Obama proposed a special tax on Wall Street banks and both Germany and France also support such a measure.
The G-20 represents about 90 per cent of global GDP, 80 per cent of world trade (including trade within the European Union) as well as two-thirds of the world's population, according to the IMF.
The G-20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the US, plus the European Union, represented by the rotating Council presidency and the European Central Bank. The Managing Director of the International Monetary Fund and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate at G-20 meetings.
The IMF report was requested by the G-20 at the Pittsburgh summit last September.