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Home > Blogs > Anthony Harrington > IMF FAT tax—Fat chance…

IMF FAT tax—Fat chance…

Finance Blogger: Anthony Harrington Anthony Harrington

It beggars belief that the biggest banks could come through the worst global recession since the 1930s, caused in no small part by their own mismanagement and reckless risk taking, then simply continue where they left off, with, possibly, some minor changes in personnel in key roles and some not-so-minor changes of ownership (including the nationalization of some).

Politicians talk a great game when it comes to imposing a tough new regulatory regime on the sector, but no one reading Christopher Dodd’s Finance Bill in the US could fail to see just how many “coach-and-horses” holes have already been drilled through that edifice, and it is still nowhere near the statute books. However, it is doubtful that the general public in many developed countries would tolerate the banks getting off that lightly. The recession caused considerable pain and the bankers have been squarely targeted as the cause, generating considerable public resentment.

This in turn paves the way, if not for effective regulation, then at least for punitive taxation. Politicians who really couldn’t regulate their way out of a paper bag have very little difficulty and, one suspects, a good deal of pleasure in the idea of imposing popular taxes (the phrase is an oxymoron under any other circumstance but in the current public mood, bankers and taxation chime happily together).

With this as the backdrop, the International Monetary Fund has responded to a request by the G20 to look into the possibility of a financial transaction tax to be imposed on the sector (see our blog posts on the Tobin tax for background), and has come out with not one, but two innovative suggestions for taxing the entire financial sector. This has astonished the insurance sector and hedge funds, who had virtually nothing to do with the crash, but has greatly pleased the media, who rather fancy seeing a little banker blood spilt by way of retaliation for the present mess. In the process, the IMF has well and truly punted the idea of a Tobin tax into the long grass. As Carlo Cottarelli, director of the IMF’s Fiscal Affairs Department, points out in his recent blog post on the IMF’s proposals:

“We also looked at the idea of a general financial transactions tax (FTT)—the last few months have left us in no doubt as to the seriousness of the public support this enjoys. This would be a tax paid every time a share, bond, or other financial instrument is bought or sold, and/or whenever foreign currency is bought or sold.

“Our work is not yet complete—this is an interim report, remember—but, while some forms of FTT may be feasible (indeed most G-20 countries already tax some financial transactions), we don’t think this is the best way…. An FTT is not focused on reducing systemic risk and it isn’t effective at taxing rents in the financial sector—much of the burden may well fall on ordinary consumers. Moreover, the financial services industry is very good at devising schemes to get around such a tax.”

Instead of the Tobin tax, or Robin Hood tax as it is sometimes called, the IMF proposes a Financial Stability Contribution (FSC), to be paid by all financial institutions (hence the howls from the insurance sector) and a wonderfully named FAT tax (Financial Activities Tax) to be levied on the profits and remuneration (pay and bonuses) of financial institutions. The IMF’s draft on this theme has been leaked but is not yet posted on the IMF website. It is due to be presented at the G20’s June summit. The initial point we would make here and now is that despite the cheers in the media when the leaked IMF draft started doing the rounds, the proposal’s audacious reach—not one tax but two, not just banks but the whole sector—may well be its undoing. If a Tobin tax is hard to get off the ground, a combined FSC and FAT tax may well prove far too heavy a lift. Canada has already punted the idea into touch and it only needs one major economy to withdraw from the idea to create a nightmare regulatory arbitrage scenario. I think we can expect an awful lot of talking and miles of headlines before a penny is raised in taxation…

Further reading on financial regulation

Tags: banking , FAT tax , IMF , Robin Hood tax , tax , Tobin tax
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