Update on the IMF, the G20 and the Robin Hood Tax

In the lead up to the June G20 summit, the IMF has issued an interim report on financial reform. G20 finance ministers and central bank governors discussed it 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. 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.

Finally, the powers that be are coming to grips with the need to reform the financial system to avert more financial crises like the costly one whose effects we are still experiencing. Except for Canada, where the government says: not our problem and rejects the notion of any measure that smacks of a tax. (To twist an old saying: Flaherty will get you nowhere.)

Broadly speaking, three options have emerged.

The Bank Levy Option

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 as in the recent crisis; in some versions, the proceeds go to national governments which would then do the bailing out.

The Robin Hood Tax Option

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 could go to governments in developed countries, to help them cope with the deficits and debt that have resulted from the economic crisis created by the financial 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.

The remainder would go to developing countries to enable them to alleviate widespread and extreme poverty and to assist them in adapting and mitigating the effects of climate change for which more advanced economies are especially responsible.

The “FAT” Option

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 – as on their profits – which then 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 would by raising the transaction cost 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 overdeveloped and 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. Indeed, that is arguably the best option.

These matters have seized the attention of the G20 and will be on its agenda when it meets in Canada in June.

Much of the IMF’s interim report is devoted to embellishing the first option, of not simply a bank levy but 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. This latter provision has the virtue that it could be used to cut back on excessive risk-taking.

Should a levy on financial institutions not raise sufficient revenue, as the IMF fears, there could also be an additional fee, the proceeds of which would go to general government revenue to make further credit available for financial institutions should that be necessary.

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 for the rest of us.

Beyond insurance, financial institutions should be responsible for fiscal side-effects of the crisis on their own government, that is, on 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.

It’s Confirmed: Banks Have Social Responsibilities

The IMF has taken an important further step beyond insurance for financial institutions. It has given legitimacy to the view that financial institutions have an obligation to pay for the collateral damage caused by their activities.

The good news mostly ends there. True, the IMF gives the Robin Hood Tax, the FTT, some consideration, more than was expected. It seems clear that civil society has had an effect.

As well, the IMF gives short shrift to one of the favourite arguments of critics. “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 itself says that measures to be taken should, amongst other things, “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 a 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 pays the tax? 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 on 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), or so-called economic rents, may not be passed on. The benefit is the public good of a more stable financial system and fewer crises. Hence the the IMF’s proposal for a FAT, has a reasonable chance of being a progressive tax paid by the fat cats to the benefit of the public.

What of the FTT? There is, frankly, a risk of some passing on. Financial institutions are, when all’s said and done, powerful, and that includes the power to push taxes down on to others. To the extent that is a risk, it requires monitoring and regulation.

The Robin Hood Tax Is A Truly Progressive Tax

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.

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 IMF has taken a good step forward. The G20 should build on this to make it a bigger and better step.

The world is well short of a done deal on all this. We must continue to push for the Robin Hood Tax.

Postscript

The April 23 G20 Finance Ministers’ communiqué calls for further IMF study “on options to ensure domestic financial institutions bear the brunt of any extraordinary government intervention where they occur, address their excessive risk-taking and help promote a level playing field, taking into consideration individual countries’ circumstances.”

In plain English: financial institutions, not governments, should bear the cost of any future bailouts, and Canada can opt out.

by Mel Watkins, John Dillon & Fraser Reilly King