IMF: tax banks or risk renewed crisis

Larry Elliott in Washington and Jill Treanor, Friday 8 October 2010 

The International Monetary Fund demanded new bank taxes and tougher financial supervision today warning that a return of “business as usual” risked sowing the seeds of the next crisis.Dominique Strauss-Kahn, the IMF’s managing director, said two new taxes on banks were needed to provide an insurance fund for future financial meltdowns and to curb excessive risktaking.


His remarks coincided with comments by the EU tax commissioner Algirdas Å emeta, who said the financial sector was “undertaxed”. He outlined an idea to tax profits and remuneration that could raise €25bn (£22bn) across the EU’s 27 states if set at 5% of banks’ profits and wages.


His proposal is separate to George Osborne’s plan to tax banks’ balance sheets – raising about £2bn a year – although the Treasury said last night that it intended to hold “further discussions with its EU partners about the benefits of a financial activities tax on certain profits and remuneration”. The EU has also considered a financial transactions tax (FTT) on stocks, bonds or foreign currency but said it would only work if applied globally.


Speaking in Washington, Strauss-Kahn slapped down the idea for such a wide-ranging financial transactions tax. At a press conference ahead of this weekend’s annual meeting of the Fund, he said the “Robin Hood tax” was not the right way to tackle speculation. Instead, the IMF favours a bank levy and a financial activities tax on the sector’s profits and pay.


“Yes, we believe a tax on the financial sector is useful,” Strauss-Kahn said. “But, no, we don’t believe the FTT is the best way to do it.”He said taxation should be used with regulation and supervision to tackle the problems exposed by the crisis of recent years. But the fund did not see an FTT as the best way to address reckless behaviour by banks because it was “a bad proxy for speculation that you want to address.”


Strauss-Kahn said the IMF was worried about banks returning to old ways of doing business. “It is not the right way to go back to business as usual, and there is a risk … despite the efforts which have been made to enhance and adapt supervision.”Failure to find a global approach to supervision would result in different systems around the world, he said. “That is an important risk because loopholes in the system are the seeds for the next crisis.


“The IMF has been repeatedly insisting since the beginning of the crisis that to repair the financial sector we need to do a lot on regulation but we also need to do a lot on supervision and crisis resolution … it would be unfair to say nothing has been done but very little has been done.”


In proposing an EU-wide tax on bank profits and pay, the commission gave few clues about how the money collected should be handled. Osborne argues that any funds should be put to general use while other finance ministers have argued that the proceeds could be used as a type of bailout fund for the next bank failures.




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