IMF proposes two new taxes on all banks and financial services companies

In view of the "too big to fail" syndrome, whether taxes are really the right way to organise the financial sector is a different question, but I will comment on one aspect of the IMF's proposal (two global taxes on financial institutions: a financial-stability contribution on bank LIABILITIES (except deposits, which come under the purview of deposit insurance schemes and are already taxed) in addition to a levy on bank EQUITY).

The IMF has proposed that the tax might be charged initially at a flat rate, changing over time to a charge according to the riskiness and size of the institution concerned.

The flat rate will either be so small as to bother no institution or, more likely, will bother smaller organisations (and therefore disproportionately institutions in smaller countries) more than larger ones.

Conversely, whenever the IMF wants to change the system to a variable rate, the larger organisations are more likely to protest and to seek to obstruct the move to a variable rate.

So the flat tax may be a political calculation that if the wedge is very thin right now, no one is going to protest too much, and the contributions can be ramped up over time.

The contribution should be looked at as a sort of insurance fee. Though in my view it would be much better to leave the job entirely to insurance or reinsurance companies (with insurance and reinsurance companies insuring each other), I recognise that it is the State which is the insurer of last resort and so it is right for the insurance fee to go to the State, provided the State keeps the money in a separate fund, with the adequacy of the contribution being evaluated from time to time either by a quango or by outside advisers.

The good thing is that the IMF wants the taxes to apply to the entire financial sector so as to avoid tempting organisations to change legal form in order to escape the net. Sphere: Related Content