As Owen Tudor at the TUC has noted:
The IMF has issued a working paper which explores the practicalities of implementing Financial Transaction Taxes.
His analysis is well worth reading. But as he notes, the IMF concluded:
In principle, an FTT is no more difficult and, in some respects easier, to administer than other taxes.
As some of us have argued for quite a long time.
Now, please do it.
As the FT notes:
Bad economic news bombarded the Treasury on Monday as new International Monetary Fund forecasts cast doubt on the chancellor’s deficit reduction plan, while near-term indicators suggested the recovery was losing the little momentum it had.
The IMF judged that Britain’s economy had less capacity to grow quickly over the next few years than the government had hoped, slowing the reduction in borrowing to the point where it comes within a whisker of missing George Osborne’s main fiscal target.
They added more bad news after that, but let’s stick to the IMF for the moment.
The message is clear – Osborne has set out his stall based on the objective that the deficit should be cut and a downward projection for debt should have been established before the next general election. It was a simple criteria for success or failure. He chose it for that reason. And it already looks certain that he won;t succeed in meeting it.
Osborne’s plan required growth – not least massive growth in tax revenues from an economy he thought would boom as he pulled back the state.
But it’s not. The reaction to his spending cuts is as any good Keynesian would have predicted: companies and consumers alike are cutting their spending in the face of the very real prospect of hardship that these cuts foretell, including the risk of loss of income, unemployment and having to make payment for services that they reasonably expected the state to supply. This is the paradox of thrift: the rational attempt by consumers and companies to save in the face of attacks on their income and future ability to earn results in a loss of real economic activity, a reduction in income for all, and an inevitable failure on the part of government to realise its objective of reducing its own deficit. That is why, inevitably, George Osborne is not meeting its target.
The downside is that the IMF seems to think that the best reaction to this will be more cuts or tax increases, and that’s the exact opposite of what is required.
Will they ever learn, or do we have to sink into oblivion first?
Cross-posted, with small amendments, from the Treasure Islands blog.
A new report from the IMF (hat tip: Markus Henn) tallies surprisingly closely, at least in part, with what TJN members have been saying for some time. Take this, for example, on the role of secrecy jurisdictions (the IMF prefers the term Offshore Financial Centers, or OFCs:)
Before the 2008–09 economic crisis, many banks and hedge funds used OFCs for off-balance-sheet activities such as the so-called special purpose vehicles or structured investment vehicles. These vehicles were typically funded in onshore financial markets and purchased onshore assets.
Indeed. Off-balance-sheet finance isn’t the same as offshore finance – but as I mention in Treasure Islands, and as the IMF agrees, there’s a massive overlap. (They both involve escaping the social contract.) Now here’s something else, in the same vein:
Commercial operations may establish an insurance company in an OFC to manage risk and minimize taxes, or onshore insurance companies may establish an offshore company to reinsure certain risks and reduce the onshore company’s reserve and capital requirements.
That’s called getting around the rules. To “reduce the onshore company’s reserve and capital requirements.” As I remarked recently on the shadow insurance system, these rules, for all their flaws, are put in place for good reason – to protect society at large. Tax havens help firms get around these rules – at great cost to society. The IMF says exactly this – albeit in its usual overly polite, stilted language:
OFCs are cost competitive, because they frequently operate under relatively weaker regulatory and supervisory financial standards—standards that are set by the host jurisdictions. This lax operational environment translates into lower administrative and operating costs but may not be fully consistent with international best practices.
Just as I explain in Treasure Islands. Anyone who thinks tax havens had nothing to do with the financial crisis is gravely mistaken. And don’t just take this as evidence – look at this trove.
Does the headline to this blog over-egg the IMF’s views? It calls its article “Bankers on the Beach” and provides the photo to accompany it, reinforcing the old myth that tax havens are palm-fringed islands. The IMF has been something of a tax haven apologist for years, and it says several more supportive things about tax havens elsewhere in the article. But read what the IMF says, above. I don’t think my headline is unfair.
There’s a table showing how big OFCs have become – over US$ 5 trillion in (each of) assets and liabilities – but I would respond by saying that the IMF, along with other organisations like the Bank for International Settlements, takes a politically convenient view of what a tax haven is – they pretend it’s mostly small islands like Cayman, whereas in fact the biggest ones are nations like the UK, the US, Luxembourg, Switzerland, Ireland and so on – big OECD economies.
I like the fact that the IMF mentions another key theme of Treasure Islands: alongside a picture of Cayman’s disproportionate share (73%!) of Caribbean offshore activity, it says
“the largest OFCs are located in nonsovereign territories—in particular, the Cayman Islands, a British overseas territory.”
Indeed – for those who keep saying that Cayman and its peers have the right to set their own sovereign tax policies – well, even the IMF knows that they are ‘nonsovereign.” (Britain – are you listening?)
Towards the end of the document, the IMF reverts to its traditional Love-The-Havens approach by wheeling out a discredited bit of research by James Hines, who claims that having a tax haven near your country boosts growth and foreign investment. Recently, my colleagues John Christensen and Richard Murphy heard that Hines was speaking at a meeting of the Policy Exchange in London, puffing the havens’ case. Christensen takes up the story:
“Richard and I sat in opposite corners of the room. It was a turkey shoot. We put it to him [Hines] that his paper hadn’t taken into account the gigantic issue of round-tripping. [That is, that much of that investment is not real foreign investment, but the result of locals going offshore, dressing up in tax haven secrecy, coming back pretending to be foreigners, and harvesting all the tax breaks and other privileges accorded to foreigners.] The effect of this will show up in figures on inequality and income distribution. Headline growth rates, which is what these studies use, simply won’t capture it. His paper doesn’t stand up the claim about growth.
We put these points to Hines, and he looked like a startled rabbit. There was a long pause – it was all quite theatrical – and he said he just didn’t know.
The IMF also asserts, without presenting any evidence, that tax havens and the ‘tax competition’ between jurisdictions that they lead, make for more efficient resource allocation in global markets:
“To some degree, this tax competition can facilitate better resource allocation.”
So here’s a challenge to the IMF. Tax havens are not just about tax competition, but about regulatory competition, competition to provide the best secrecy, and so on. How exactly does that ‘competition’ work? How does the secrecy world, or these regulatory problems it mentions here, or the ensuing inequalities, play into this ‘more efficient resource allocation?’
IMF: I would love to hear from you on this.
End Note: s a nice picture, for aspiring policy wonks, of which body has responsibility for which bit of the offshore financial architecture:
Hat tip: James
The following comes from the SturdyBlog by Alex Andreou. Alex is not a professional economist any more. He’s now an actor, so no doubt the Tories will seek to dimiss his opinion as “unqualified”. But the simple fact is he can outwit the IMF any day. That’s the reality of the economic opposition now, of which he’s a part. It’s reposted with his permission.
“Before Tory commentators are enraptured with hysterical joy at the ringing endorsement of their fiscal policies as “appropriate” and “adequate” by the IMF, a few things should be borne in mind.
A credit to the IMF
1. The IMF is a body with a very specific agenda. It was best described by former head of the World Bank, Joseph Stiglitz, to Johann Hari: “When the IMF arrives in a country, they are interested in only one thing. How do we make sure the banks and financial institutions are paid?… It is the IMF that keeps the [financial] speculators in business. They’re not interested in development, or what helps a country to get out of poverty.” I would urge you to read Hari’s article in full: It’s not just Dominique Strauss-Kahn. The IMF itself should be on trial. It is also worth noting that the IMF is bound underthe rules of Article IV consultations to “respect the domestic social and political policies of members” when consulting (Section3b).
2. Argentina, which had been the busty centrefold of IMF policies throughout the 1990′s by sticking religiously to all IMF advice – privatising everything but their anthem, liberalising industries, lowering corporation taxes while tightening public spending – suffered one of the most catastrophic economic collapses in 2001. I would encourage you to watch the Fernando Solanas’ 2003 excellent documentary “Memoria del Saqueo“, if you wish to know more.
3. Last year, Hungary told the IMF to take its recommendations and shove them where the Strauss-Kahn don’t shine. The IMF insisted on tougher austerity measures, Hungary wanted to tax its banks and the rich. Talks between Hungary and the IMF collapsed and the IMF warned that Hungary would be punished for its folly. The Centre for Economic and Policy Research warned that the IMF’s obsession with austerity was dangerous. A year on, the IMF had to eat its words and commend Hungary for its ongoing recovery, which is going very well – thank you.
4. Finally, it is most crucial to note what the IMF had to say on the UK economy in 2007, the performance of which it described as “impressive”. They said: “The financial sector is strong and well supervised with a principle-based approach. The fiscal framework is good, and the mission focused on how to build fiscal cushions needed to respond to adverse shocks. In particular, looking ahead to the framework over future cycles, we noted that debt is likely to rise to just under 40 percent of GDP over the next few years. This in itself is not a concern, and it still constitutes one of the lowest debt ratios among G-7 countries”. This was the year before the whole fecking thing collapsed on our heads.
In conclusion, one ought to approach any fiscal advice by the IMF like a chambermaid might approach the hotel room of its former head: with extreme caution.
Next week: Harold Shipman endorses the government’s policy on the NHS
As the FT has just reported:
The International Monetary Fund badly missed the risks that led to the global financial crisis because of a naive admiration of light-touch US and UK financial regulation and a “groupthink” mentality, according to its watchdog.
A sharply critical report from the fund’s independent evaluation office, published on Wednesday, said that the IMF was very late to spot the severe interconnected problems in the world’s advanced economies. As late as the summer of 2008, the IMF’s management was confident that “the US has avoided a hard landing” and “the worst news are [sic] behind us”, the report said.
“The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches,” the report concluded. The fund’s analysis and economic modelling focused largely on traditional macroeconomic approaches and failed to spot the huge risks building up in financial systems in countries such as the US and UK.
That wasn’t “groupthink”.
That was neoliberal economics.
Why not just say it didn’t work?
And why not say it isn’t working now, but that the banks are still pursuing it?
That would be a lot more use.
The Third World Network has reported that despite pledges to address the crisis in flexible and innovative ways, the IMF’s key objective in crisis loans remains “macroeconomic stability” through the “tightening of monetary and fiscal policies.”
Since the onset of the financial crisis in 2008, IMF crisis loans have required policies such as:
• lowering fiscal deficits and inflation levels;
• buffering international reserves (as they fell to dismal levels from the impact of the trade shock in this financial crisis);
• reducing or restraining public spending (through public sector wage freezes and pension freezes, cutting minimum wages, eliminating subsidies to fuel, gas and power, and hiking utility tariffs and tax reforms);
• increasing official interest rates or restraining the growth of the money supply;
• preventing currency depreciation; and,
• providing financial sector liquidity where needed.
Instead of increasing government expenditure and boosting domestic demand, local employment and economic activity to overcome the recession, the IMF is cutting spending and increasing tariffs and taxes in already contracting economies for the purpose of maintaining low inflation and fiscal deficit rates, flexible exchange rates, and trade and financial liberalization. The burdens of these questionable policies, intended to maintain investor confidence, access to external capital and sustainable debt situations, fall squarely on the shoulders of local taxpayers and consumers.
As I have argued time and again, and as Krugman, Wolf, Galbraith at al do likewise, time and again, these policies not openly make no sense, they are utterly counter productive.
The neo-liberal agenda of oppressing the poor for the relative benefit of the well off continues unabated.
And in the end we all pay for that – even the better off. See The Spirit Level if in doubt (can’t get link right now).
And that’s why the IMF is either seriously misguided or so deliberately blind to the consequences of its actions in pursuit of the interests of a tiny minority.
I fear the latter, because that appears to be the whole neo-liberal agenda in a nutshell: screw the 99% in the interests of the 1% is the best summary of it there is.
The Wealth Bulletin has reported:
Research has found huge discrepancies in the amounts declared by offshore centres
The amount of undeclared money languishing in offshore financial centres has always been difficult to quantify: the very nature of it being undeclared makes it hard to trace. But work by economists at the International Monetary Fund has shed new light on the cash involved, confirming it runs into trillions of dollars.
Gian Maria Milesi-Ferretti, an economist for the IMF in Washington, said statistical information on Luxembourg, one of the largest offshore financial centres in Europe, illustrated the extent of the problem. He said: “Luxembourg is one of the few offshore centres that disclose detailed statistics on assets and liabilities held in the financial sector, which makes it invaluable to understand cross-border money flows.”
The latest available IMF figures show portfolio assets held by foreigners in Luxembourg to be worth $1.5 trillion at the end of 2008. But looking at statistics provided by the Luxembourg Government on portfolio investment liabilities for the country – the mirror image of the asset information held by the IMF – there is a big discrepancy. The investment liabilities in Luxembourg were $2.5 trillion – $1 trillion (€726bn) more than the assets reported.
Milesi-Ferretti said: “This is a huge difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries do not report their portfolio investments or their destination to the fund.” China, Taiwan and many of the oil-exporting countries do not participate in the IMF’s survey.
The IMF found a similar discrepancy in the Cayman Islands data, whereby the $2.2 trillion in equity liabilities reported by the country, a British overseas territory, at the end of 2007 – the latest figures available – bears little resemblance to the $750bn of portfolio assets reported to the international organisation.
Taken together, the data for the two offshore centres alone shows at least $2 trillion remains unaccountable for. And the fact that many undeclared funds in offshore accounts are held in cash deposits, not in portfolio investments, means the sum is likely to be much higher.
Switzerland – the biggest offshore financial centre – has only a small discrepancy between what it reports as portfolio liabilities and what it reported to the fund as assets, but the Government admits to having at least $600bn in undeclared accounts.
I admit I can’t resist the temptation to say that some of us have been saying this for a long time. The Tax Justice Network published my research on this in 2005, suggesting there were £11.5 trillion of assets offshore. Time and again this has been attacked by organisations that should have known better and by academics with a right wing axe to grind. But now, like so much else I and others have argued, it is being validated. And the issue itself, once dismissed as inconsequential is now being considered seriously:
Although the IMF is concerned about the undeclared assets held in offshore centres from a tax perspective, it is particularly concerned about how this money affects cross-border financial interaction and contributes to shocks in the global economy such as the recent credit crisis.
Milesi-Ferretti said: “The Cayman Islands were the largest foreign holder of private-label US mortgage-backed securities on the eve of the financial crisis. More information on the ultimate holders of these securities could clearly provide valuable insights on the transmission of the ‚Äòsub-prime shock’ and the financial crisis more generally.”
The IMF believes the sum of the external assets and liabilities of what it calls small international financial centres – which includes all the offshore centres except Switzerland – is $18 trillion.
Well, in that case apologies are in order – as ever, we were too cautious in our estimates.
The figure is higher than those of big investing countries such as France, Germany or Japan and is a multiple of those of other large economies such as China.
Milesi-Ferretti said: “What is even more striking is that this number is likely to be an underestimation given the data problems with offshore financial centres.”
That is an especially timely admission: I am in Washington to discuss this data issue with the IMF later this week. I’,m now looking forward to constructive dialogue, debate and a programme for action.
IMF presses for tax on banks’ risky behaviour | Business | guardian.co.uk .
The International Monetary Fund today threw its weight behind a new tax on the global financial sector designed to limit risky speculative behaviour and help the world’s poorest countries.
Dominique Strauss-Kahn, the IMF‘s managing director, said banks and other big financial institutions were responsible for systemic risk and it was only right that they provided resources to mitigate those threats to the world economy.
While ruling out a so-called Tobin tax – a levy on foreign currency transactions proposed by the American economist James Tobin in the early 1970s – Strauss-Kahn said a high-level IMF team would work on proposals in the coming months.
Two comments:
1) Glad they’ve caught up with what some of us have been saying for some time
2) As ever, they call it wrong.
I’m not holding my breath.
| © 2005 - 2011 Tax Research UK. Some rights reserved.  |
Suffusion theme by Sayontan Sinha |
