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IMF Backs Flat Tax to Defray Bailouts

Eli Clifton

WASHINGTON, Apr 21 2010 (IPS) - Political momentum for a levy against the world’s largest banks to repay governments for the cost of bank rescue packages during the global financial crisis has gained momentum with the leak of an International Monetary Fund (IMF) report which calls for a set of taxes against the financial industry.

Under the IMF’s model, a “Financial Stability Contribution” (FSC) would be imposed on financial firms and would be based on the potential damage that a firm’s collapse would impose on the economy.

The FSC could “either accumulate in a fund to facilitate the resolution of weak institutions or be paid into general revenue. The FSC would be paid by all financial institutions, with the levy rate initially flat, but refined over time to reflect institutions’ riskiness and contributions to systemic risk…,” said the IMF.

The report, “A Fair and Substantial Contribution by the Financial Sector”, also endorses a “Financial Activities Tax” (FAT) on bank profits and salaries.

The IMF’s endorsement of a bank tax was welcomed by many observers, but advocates of a Financial Transactions Tax (FTT), which would aim to curb speculative behaviours, were disappointed by the IMF’s assertion that such a tax “does not appear well suited to the specific purposes set out in the mandate from G20 leaders”.

“We think that the benefit of a financial transactions tax is that it would curb financial speculation. We don’t think that a financial transactions tax and a bank levy are mutually exclusive. You can have both. We would like to find ways to reduce the systemic risk and get the banks to repay a fair share of the costs they imposed during the financial crisis,” Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies, told IPS.


Oxfam International welcomed the IMF’s endorsement of a FAT but took issue with the Fund’s arguments against imposing a transaction tax.

“The IMF’s proposed taxes are a major step forward, but the report falls short on two counts,” wrote the analysis.

“Firstly, amounts of money that the IMF suggest this tax would raise are not sufficiently ambitious – 11 billion dollars (₤7bn) a year – not nearly enough compared to the pain the crisis has caused and will barely dent the profits of the banks. Secondly, the report makes no commitment to ensuring money raised would be used to help poor countries and fight climate change.”

The IMF report will be reviewed by the finance ministers from the G20 who are in Washington this week for the annual spring meeting of the World Bank and IMF.

The BBC leaked the report, which was intended to be confidential advice for the finance ministers.

Discussions about the implementation of a FAT, FSC or FTT comes after the Pittsburgh G20 last fall where the G20 asked the IMF for recommendations on how to recover the massive public funds spent to bailout the financial sector and pay for future crises.

Opinions on how to recoup public funds have differed on each side of the Atlantic.

Support for a FTT had been growing in Europe with advocates of such a tax arguing that it would recover funds used to prop up the financial sector while deterring the type of speculative investments which are seen to play a destabilising role in the world economy.

The recently leaked IMF paper would suggest that European support for the FTT may be flagging, with the European Commission (EC) asserting that a FTT “would affect the price finding mechanism and could have negative effects on the allocative efficiency of financial markets.”

But proponents of such a tax strongly disagree with the EC and the IMF’s findings.

“What a financial transactions tax would target is high flying speculators, not the ordinary, middle class investor. They would hardly feel this tax,” said Anderson.

U.S. President Barack Obama has not championed a transactions tax but has advocated for a flat tax on banks, such as the ones endorsed in the IMF report.

In January, Obama proposed a 10-year, 90-billion-dollar levy on banks – the Troubled Asset Relief Programme – to recoup the cost to taxpayers of the financial sector bailouts.

The White House has been lobbying on Capitol Hill this week for legislation to reform the financial sector. The report from the IMF will boost those lawmakers who are calling for a “bank tax” to be included in the legislation designed to reform the financial industry.

The leaked report reflects the IMF’s push for an internationally standardised set of bank taxes and a system of taxation which is not only applied to banks but also to a broader set of firms which participate in the financial sector.

“International cooperation would be beneficial, particularly in the context of cross-border financial institutions,” read the report.

“Cooperative actions would promote a level playing field, especially for closely integrated markets, and greatly facilitate the resolution of cross-border institutions when needed,” the report went on to say.

 
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