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Centre for Responsible Credit London: IMF publishes final proposals for bank taxes

The International Monetary Fund has set out further details of its preferred mechanisms to ensure the financial sector makes a ‘fair and substantial contribution’ to cover the likely costs of any future crises and to general tax revenues.

In its final report on the issue, which will now go forward for decision by the G-20, the IMF highlights that the as yet unrecovered direct costs to the UK of saving the financial system amount to a massive 6.1% of GDP, compared to 4.8% in Germany, 3.6% in the US. These direct costs are combining with lost economic growth, collapsing tax revenues, and high welfare demands resulting from the growth in unemployment, to drive up levels of Government borrowing.

The IMF proposes two measures:

  • A levy on the financial sector, termed a Financial Stability Contribution (FSC) that will provide Governments with funds to meet the costs of any future crises. The FSC should be linked to a ‘credible and effective resolution mechanism’ to provide for the wind down of failing institutions in a crisis and should be set to gather between 2% and 4% of GDP in most countries, with possible additional charges to be levied post crisis in order to recover actual costs
  • A Financial Activities Tax (FAT), which will offset the favourable VAT treatment of the financial sector, and would ensure the sector makes a higher level of contribution to tax revenue more generally. The IMF believes this would help to limit the overall size of the sector and that the FAT could also be designed to prevent excessive risk taking. In the case of the UK it suggests that the FAT could raise an amount equal to 0.3% of GDP

A further working paper on the precise form that the FAT could take is now in preparation at the IMF.

However, the IMF rejected calls for a ‘Robin Hood’ tax on financial transactions as it feared banks would pass the cost of such a tax on to its customers.

The full report can be found here

http://www.imf.org/external/np/g20/pdf/062710b.pdf

ID: 45715
Publication date: 09/07/10
   
URL(s):

http://www.imf.org/external/np/g20/pdf/062710b.pdf" target="_blank">IMF Report
 

Created: 09/07/10. Last changed: 10/07/10.
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