Bank tax

A bank tax ("bank levy") is a tax on banks. One of the earliest modern uses of the term "bank tax" occurred in the context of the Financial crisis of 2007–2010.

On 16 April 2010, the International Monetary Fund (IMF) proposed the idea of a "financial stability contribution" (FSC), which many media have referred to as a "bank tax." It was proposed as one of three possible options to deal with the crisis. These options were presented in response to an earlier request of the G-20 leaders, at the September 2009 Pittsburgh summit, for an investigative report on all possible options to deal with the crisis.^[1]

Both before and after that IMF report, there was considerable debate amongst national leaders as to whether such a "bank tax" should be global or semi-global, or whether it should be applied only in certain nations.

History

In the context of the Financial crisis of 2007–2010, in August 2009, British Financial Services Authority chairman Lord Adair Turner said in Prospect magazine that he would be happy to consider a "tax on banks" to prevent excessive bonus payments.^[2]

G20 request to IMF

At the September 2009 G-20 Pittsburgh summit, the G20 nation leaders asked the IMF "to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."^[3]

IMF responds to G20 request

When the IMF presented its interim report^[4][5] for the G20 on April 16, 2010, it laid out the following three options. Notice that they are all distinct from each other:

1. Financial stability contribution (FSC), or "Bank tax"

• Financial stability contribution (FSC), or "Bank tax," or "Bank Levy," – a tax on financial institutions’ balance sheets (most probably on their liabilities or possibly on their assets) whose proceeds would most likely be used to create an insurance fund to bail them out in any future crisis rather than making taxpayers pay for bailouts.

Much of the IMF’s report is devoted to the first option of a levy on all major financial institutions balance sheets. Initially it could be imposed at a flat rate and later it could be refined so that the institutions with the most risky portfolios would pay more than those who took on fewer risks. Such a levy could be modeled on President Obama’s proposed Financial Crisis Responsibility Fee that would raise US$90 billion over 10 years from US banks with assets of more than US$50 billion. If Obama’s proposal is approved by the US Congress, the proceeds would go into general government revenues. They would be used to pay the costs of the current crisis rather than go into an insurance fund in anticipation of the next one.^[3][6]

2. Financial Activities Tax (FAT)

• A Financial Activities Tax or FAT – raised on the sum of bank profits and bankers’ remuneration packages with the proceeds going into general government revenues.^[7][8]

3. Financial Transaction Tax

• A Financial Transactions Tax (FTT) – on a broad range of financial instruments including stocks, bonds, currencies and derivatives.

In November 2009, (two months after the 2009 G-20 Pittsburgh summit of heads of state), the G20 nation Finance Ministers met in Scotland to address the Financial crisis of 2007–2010. However, they were unwilling to endorse the German proposal for a Financial Transactions Tax:

"European Union leaders urged the International Monetary Fund on Friday to consider a global tax on financial transactions in spite of opposition from the US and doubts at the IMF itself. In a communiqué issued after a two-day summit, the EU’s 27 national leaders stopped short of making a formal appeal for the introduction of a so-called "Tobin tax" but made clear they regarded it as a potentially useful revenue-raising instrument."^[9]

While the IMF does not endorse an FTT, it concedes that "The FTT should not be dismissed on grounds of administrative practicality."^[3][4]

The difference between a Bank Tax and a Financial Transaction Tax

A "bank tax" ("bank levy) is distinct from a financial transaction tax in the following way:

A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves. Instead, it is charged only on the specific transactions that are designated as taxable. If an institution never carries out the taxable transaction, then it will never be taxed on that transaction.^[10] Furthermore, if it carries out only one such transaction, then it will only be taxed for that one transaction. As such, this tax is neither a Financial activities tax (FAT), nor a Financial Stability Contribution (FSC) aka "Bank tax",^[11] for example. This clarification is important in discussions about using a financial transaction tax as a tool to selectively discourage excessive speculation without discouraging any other activity (as Keynes originally envisioned it in the 1936.^[12] )

Aftermath to IMF report

On June 27, 2010 at the 2010 G-20 Toronto summit, the G20 leaders declared that a "global tax" was no longer "on the table," but that individual countries will be able to decide whether to implement a levy against financial institutions to recoup billions of dollars in taxpayer-funded bailouts.^[13]

Nevertheless Britain, France and Germany had already agreed before the summit to impose a "bank tax." ^[13] On May 20, 2010, German officials were understood to favour a financial transaction tax over a financial activities tax.^[14]

Two simultaneous taxes considered in the European Union

On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactions after G20 leaders failed to agree on the issue.

The financial transactions tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. EU leaders instructed their finance ministers in May 2010 to work out by the end of October 2010, details for the banking levy, but any financial transaction tax remains much more controversial.^[1][15]

Controversies

Should the bank tax be global?

On August 30, 2009, British Financial Services Authority chairman Lord Adair Turner had said it was "ridiculous" to think he would propose a new tax on London and not the rest of the world.^[16] However, in May, and June 2010, the government of Canada expressed opposition to the bank tax becoming "global" in nature.^[11]

Controversy over the IMF's refusal to promote a financial-transactions tax

In a detailed analysis of the IMF’s proposals, Stephan Schulmeister of the Austrian Institute of Economic Research finds that, "the assertion of the IMF paper, that [a financial-transactions tax] ‘is not focused on the core sources of financial instability,’ does not seem to have a solid foundation in the empirical evidence."^[17] Yet at least one independent commentator has endorsed the IMF's view.^[1]

In an alternative critique of the IMF's stance, Aldo Caliari of U.S. NGO the Center of Concern said, "the naiveté with which the IMF approaches its preferred mechanism—a bank tax tied to systemic risks—is astonishing for such a knowledgeable institution, unless it is in fact designed to let the financial sector off the hook."^[17] He argues that the FAT and FSC do not reduce the overall risk in the system, and may increase it if banks are encouraged to feel that the taxes provide a government guarantee of future bailouts. Nonetheless, a 2010 Tulane Law Review article lent lukewarm support to President Obama's Financial Crisis Responsibility Fee, which is a "bank tax" similar to the FSC.^[1] The Tulane article concluded that taxing financial transactions would be "foolish", and that a bank tax "could constitute shrewd regulatory reform if done properly."^[1]

See also

• Financial Crisis Responsibility Fee
• Bank
• Currency transaction tax
• Financial transaction tax
• List of G-20 summits
• Robin Hood tax
• Spahn tax
• Tax
• Tobin tax
• Transfer tax

References