Update on the IMF, the G20 and the Robin Hood Tax*
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In the lead up to the June G20 summit, the International Monetary Fund has issued an interim report on financial reform that the G20 finance ministers and central bank governors discussed when they met in Washington April 23.
Preoccupied with Greece’s financial woes, the G20 ministers did not make any decisions on the IMF report’s recommendations before kicking the ball forward to the June summit. They simply asked the IMF to conduct a further study. The good news is that the idea of a Robin Hood Tax on financial transactions is still among the options under consideration.
The IMF and the G20 are finally discussing some actual reforms of the financial system to avert more crises like the costly one we are still experiencing. Although the government of Canada rejects any measure that smacks of a tax, a serious discussion of measures to make the banks take responsibility for the crisis they provoked is underway.
Broadly speaking, three options have emerged.
1. The Bank Levy
The first is a bank levy, or tax on banks’ balance sheets, which could be imposed on financial institutions in general. The proceeds would most likely be used to create an insurance fund to bail the banks out in any future crisis rather than taxpayers doing so.
2. The Robin Hood Tax
We call the second option the Robin Hood Tax because of its ability to take from the better-off, concentrated in the developed countries, and give to the poor, particularly the extreme poor, in the developing countries. Others, including the IMF, call it the Financial Transactions Tax or FTT. It is a tax on a broad range of financial transactions which financial institutions and speculators engage in.
A portion of an FTT would go to developing countries to alleviate widespread poverty and to assist them in adapting and mitigating the effects of climate change for which more advanced economies are especially responsible.
The remainder would go to governments in developed countries, to help them cope with the deficits and debt that have resulted from the economic crisis This would mean governments would not have to impose the austerity measures that hurt its own people, particularly those who are least well off.
3. The “FAT”
The third option is a Financial Activities Tax or FAT – an appropriate acronym since it is in fact a tax on fat cats. It would tax bank profits and bankers’ excessive remuneration packages with the proceeds going into general government revenues.
It’s Not All or Nothing
These three options need also to be evaluated in terms of whether or not they deter excessive risk taking which was at the core of the recent financial crisis. On the face of it, a levy on financial institutions which goes into an insurance fund, does not deter risk. It might even worsen the situation because those who take bad risks get bailed out.
A tax on financial transactions, by raising the transaction cost, would help to deter risky transactions of uncertain payoff. Still, the best means to deter excessive risk taking is by rules and regulations on the behaviour of the financial institutions.
In the developed countries, financial sectors are engaged in much that is unproductive and wasteful, and any tax, including an FTT, that reduced their size would be helpful.
These three options do not have to be seen as alternatives since they serve different purposes. Some combination of these options could be implemented.
Much of the IMF’s interim report is devoted to embellishing the first option, of a levy on all major financial institutions to provide insurance for them. Initially at a flat rate, it could later be refined to reflect the riskiness of different institutions.
Should a levy on financial institutions not raise sufficient revenue, as the IMF fears, there could also be an additional fee. The IMF calls these levies and fees the Financial Stability Contribution (FSC). The virtue of that name is that it reminds us that financial stability is a public good, good not only for the financial institutions but also for the rest of us.
Beyond insurance, financial institutions should be responsible for fiscal side-effects of the crisis on government deficits and debt. To deal with this the IMF proposes the third option: a Financial Activities Tax or FAT that would tax profits and excessive remuneration packages.
The IMF has given legitimacy to the view that financial institutions have an obligation to pay for the collateral damage caused by their activities.
IMF Gives Robin Hood Tax a Mixed Review
While the IMF gives the Robin Hood Tax some consideration, in fact more than was expected (reflecting successful civil society pressure), it fails to endorse an FTT. However, the IMF does give short shrift to one of the favourite arguments of the critics of a Robin Hood Tax. “The FTT,” writes the IMF, “should not be dismissed on grounds of administrative practicality.” This is a major point.
Regrettably, the IMF stops there. It chooses to interpret its mandate from the G20 narrowly. The report says that measures should be taken to “enable, if desired, a contribution of the financial sector to reflect the wider fiscal and economic costs of financial crises.” But it then limits the costs to those experienced within each country.
This is disappointing because the very essence of the financial crisis is that it is global, above all in its effects. The IMF’s FAT proposal takes account of the national effects but not of the global effects, a distinction that is hard to defend given the reality of globalization and puzzling when put forth by an institution that is itself global.
To take a global perspective would be to recognize that the FTT is the necessary step to go beyond the FAT. Obligations of governments, of institutions, of citizens are global as well as national. The IMF has not faced up clearly to the need for more revenue to permit the developed countries to meet the UN Millennium Development Goals to which they have committed. It has not given due weight to the global crises of inequality and of climate change.
The greatest virtue of the FTT is that it is a genuinely global tax, the first of its kind, fully appropriate to the times in which we live.
Who at the end of the day would pay a levy? the FAT or an FTT?
v The so-called incidence of a tax depends both on who pays it, not just directly but ultimately, and on who benefits from it.
The chief executive of the Royal Bank of Canada says that banks would pass the cost of a bank levy, what the IMF calls a Financial Stability Contribution, on to their customers.
Conventional wisdom says that a tax on bank profits, if it captures excess profits (which certainly exist) may not be passed on. The benefit is the public good of a more stable financial system and fewer crises. Hence, the IMF’s proposal for a FAT has a reasonable chance of being a progressive tax paid by those with excessive earnings to the benefit of the public.
What of the FTT? There is, frankly, a risk that financial institutions could pass on some of the tax to others through for example, higher fees. To the extent that it is a risk, it requires monitoring and regulation.
If the proceeds of the tax are spent on fighting global poverty and climate change the results would be highly progressive in terms of income distribution and would guarantee that the net benefit would be large. In short, the FTT would fulfill its promise as a Robin Hood Tax.
Canada Still the Biggest Opponent
In the midst of this grand debate, the position of the Canadian government is that it has no relevance to Canada. Our banks weathered the financial crisis better than any other country, which is true. Therefore, says Minister Flaherty, there is no need for a levy on financial institutions. Insofar as such a levy is for insurance purposes only, he’s right.
Flaherty goes one step further and advocates a self-insurance scheme where banks would sell debt which, in the event they got into financial difficulties, would be converted into equity, thereby avoiding payments on the debt and making existing shareholders take a hit. It is an ingenious proposal but may have no relevance outside Canada. The IMF report makes no reference to it.
The deep flaw in the government’s position is that it somehow imagines that the soundness of the Canadian financial system means that the financial crisis and the economic crisis are not relevant to Canada. Of course, they are for these are global phenomena from which no country is immune.
Indeed, the economic crisis has quickly caused governments at all levels to experience bigger deficits and rising debt. The FAT, the proceeds of which go into government revenue, deals with this, and its implementation would mean avoiding the imposition of unnecessary austerity on Canadians – which is no small matter.
As for the FTT, its implementation would mean that we could meet the Millennium Development Goals and pay for some of the costs of climate change – which is a very large matter.
The world is well short of a done deal on all this. We must continue to push for the Robin Hood Tax.
*Adapted for KAIROS from a commentary written by Mel Watkins for the Canadian Robin Hood Tax campaign.