A leaked copy of the IMF’s report to the G20 on A fair and substantial contribution by the financial sector has been criticised by campaigners for inadequate analysis of the potential of the financial transactions tax (FTT), dubbed the Robin Hood tax. Instead, the IMF proposes two different financial sector taxes to cover some of the costs of the financial and economic crisis.
An initial draft of the IMF’s proposals for how the financial sector could contribute to the costs of the crisis was discussed by G20 finance ministers in April, and a revised draft considered in early June. A final report is due to be submitted to the 26-27 June G20 heads of state meeting in Toronto, Canada. A leaked version of the report highlights huge costs of the crisis to governments: state guarantees to financial institutions “averaged 25 per cent” of GDP, with “government debt in advanced G20 countries. projected to rise by almost 40 percentage points of GDP during 2008 -2015.” However, it does not focus on the overall costs of the crisis, including unemployment and economic contraction with its proposals intended instead to simply “ensure the financial sector meets the direct fiscal cost of any future support.”
The IMF proposes two taxes. First a financial stability contribution (FSC) which would tax all financial institutions’ overall balance sheets, with the proceeds intended to cover any future costs to governments of bail-outs or restructuring of financial institutions. This would be similar to bank levies proposed by the US and a number of European countries. Though this would initially be charged at a flat rate for all institutions, it could later be adjusted to, “reflect institutions’ riskiness and contributions to systemic risk.” The second proposal, a financial activities tax (FAT), would be levied on financial institutions’ overall profits and remuneration to cover the “wider costs [to the economy] associated with financial crises.”
Despite the relatively small amounts of revenue these taxes would raise compared to the overall size of the financial sector or the economic damage wrought by the recent crisis, they have predictably been attacked by interest groups within the financial services industry.
The main critique has been that the IMF has not gone far enough, either in proposing taxes that could reduce systemic risk or cover the real cost of the crisis. In particular, international campaigners have been dismayed that the IMF paid scant attention to the FTT which could potentially raise far larger revenues than either the FSC or FAT. The FTT would impose a small levy on transactions such as currency or share trading to both raise revenues and reduce unproductive speculative activity.
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 an FTT ‘is not focused on the core sources of financial instability,’ does not seem to have a solid foundation in the empirical evidence.”
Aldo Caliari of US 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.” 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.
International Trade Union Confederation head, Guy Ryder, said that they were disappointed with the low level of attention given to the FTT, even though the IMF “recognises that a sufficient basis exists for practical implementation of at least some form of FTT and that implementation challenges are no different from the IMF report’s preferred options.”
In response to widespread criticism, the IMF promised to include a more detailed annex on the FTT in its second version of the paper, but did not alter its stated preference for the FAT and FSC.
The communiqué of the early June G20 finance ministers meeting had only a passing reference to the IMF report, confirming that the Canadian government is unlikely to prioritise this issue at the Toronto G20 meeting in June. Further progress is unlikely until the Korean G20 meeting in November.