IMF recommends new bank taxes
The International Monetary Fund is recommending the Group of 20 nations tax financial institutions’ non-deposit liabilities and the sum of profit and compensation to help pay for future bailouts of the industry.
The two levies, with those on liabilities taking priority, are part of a preliminary report the G20 requested last year to review how the financial industry can help pay for government efforts to repair the banking system.
While the IMF will deliver a final report to heads of state and government in June, France and the UK have already backed the idea of a tax on banks.
“Measures that impose new costs on financial institutions will need to reflect and be coordinated with regulatory changes under consideration,” according to the report, titled “A Fair and Substantial Contribution by the Financial Sector.”
Policy makers from the G20 are weighing proposals to have banks shoulder the costs of rescuing the financial industry after governments and central banks around the world provided an estimated €8.2 trillion to institutions.
Heading into this week’s meetings in Washington of the IMF, World Bank and G20 nations, there is growing acceptance of a financial risk levy, a US Treasury official told reporters in Washington yesterday.
Debate during the April 23 talks will focus on winning over skeptics such Canada and deliberating on the details of such a fee, the official said.
The liabilities tax should be coupled with a “resolution mechanism” to dismantle a failing firm without disrupting the rest of the financial system, the report said.
“International cooperation would be beneficial, particularly in the context of cross-border financial institutions,” it said.
The IMF said that the fiscal costs of direct support to the financial system, excluding the amounts recovered so far, have averaged 2.7pc of gross domestic product for advanced G20 economies.
“These are important proposals,” UK Chancellor of the Exchequer Alistair Darling said in a statement yesterday.
“The recognition that banks should make a contribution to the society in which they operate is right” and “any agreement has to be international,” he said.
In some cases, unrecovered costs remain “very high,” the IMF said, citing 5.4pc of GDP in the UK, 3.6pc in the US and 4.8pc in Germany.
As a result of the crisis, public debt in G20 advanced economies is projected to rise by almost 40 percentage points of GDP by 2015 from 2008, the institution forecast.
The levy on liabilities, flat at first, could be drawn from experiences of past crises, which suggest that 2pc to 4pc of GDP would be sufficient, the IMF said.
The proceeds could go to a resolution fund or to countries’ budgets, the IMF report said.
The IMF said taxes should exclude equity “to reward capital accumulation, and insured liabilities to avoid double imposition.”
Other liabilities could be taken out of the taxable amount, such as subordinated debt and government guaranteed debt, it said.
Any additional contribution from the financial industry should be raised through a “financial activities” tax, which the IMF said would be levied on a combination of profits and compensation and could raise “significant revenue.”
After exploring a tax on financial transactions, the IMF said it doesn’t “appear well suited to the specific purposes set out in the mandate from G20 leaders.”
Such a levy “is not focused on core sources of financial instability,” and its “real burden may fall largely in final consumers rather than, as often seems to be supposed, earnings in the financial sector,” the IMF said.
The IMF’s report cites examples of taxes already under review in some countries, including a US government plan to impose a 0.15pc tax on liabilities of financial companies with assets of more than $50bn; a German levy on banks that would go into a stability fund; and French and UK assessments on bank bonuses to curb excessive risk-taking.
IMF Managing Director Dominique Strauss-Kahn, in a March 7 interview in Kenya, warned that part of the financial industry had gone “back to practices of risk taking, which is probably not the most appropriate to have a stable financial system at the global level.”