IFI governance


IMF changing position on financial sector taxation?

30 September 2010

After the IMF’s initial dismissal of a global financial transactions tax (FTT, see Update 71), its opposition lately seems to have softened. An August draft working paper by a Fund staffer was welcomed by campaigners for its positive view of FTTs.

The draft paper, Taxing financial transactions: Issues and evidence, contradicts claims that FTTs are unfeasible and hard to implement, finding that securities transactions taxes (STTs) on secondary trading in equity shares, the most common form of FTT, have been and continue to be used by numerous developed and developing countries. The paper reports little evidence that STTs distort markets, and notes that major financial centres such as the UK, Switzerland, Hong Kong, Singapore, and South Africa all impose some form of STT. It adds that STTs might help to contain “herding behaviour” through “decreased short-term trading”. The report also says that “due to the large size of the base, a low-rate STT on stocks, bonds, foreign exchange and their derivatives could raise substantial revenues.”

Rather than a tax on financial transactions, the IMF’s June report to the G20, A fair and substantial contribution by the financial sector, proposed only taxation of bank balance sheets (a financial stability contribution) and excessive profits and remuneration generated from financial trading (a financial activities tax, see Update 71).

The subsequent draft IMF working paper, in contrast, echoes the results of a September report, Raising revenue, by UK NGOs Just Economics, Health Poverty Action, and Stamp Out Poverty. It shows that FTTs have successfully been implemented on a permanent or temporary basis in at least 40 countries over the last few decades, “either as a means of raising revenue or as a way of regulating markets and enhancing financial stability.” Particular positive social and wealth impacts of FTTs were found for developing and middle-income countries, where “revenue can be raised from their own financial sectors which can make a significant contribution both to safeguarding and extending public spending on, for instance, health and education.”

A meeting of European finance ministers in early September failed to reach agreement on EU-wide financial sector taxation.  While Germany, France, Austria and Belgium generally showed support for the FTT, Sweden, the Netherlands and the UK were less convinced by the idea. French president Nicolas Sarkozy also called for an FTT to pay for global development at the UN’s Millennium Development Summit in mid September.

Whether evidence of the impact of FTTs will inform the Fund’s position on financial sector taxation is uncertain. At a mid September conference on financial sector taxation at the IMF’s Paris office, the yet to be published working paper remained unmentioned, with the earlier IMF report to the G20, which favoured the financial activities tax, constituting the reference for debate.