The IMF has issued its draft report to the G20 on taxing banks. This is an issue about which I have concern, having written extensively about it earlier this year.
The IMF report says:
This is an interim response to the request of the G-20 leaders…..
Many proposals have been put forward to recover the cost of direct fiscal support— some of which have been implemented. Proposals for the government to recover these costs
include levies related to selected financial sector claims and taxes on bonuses and specific financial transactions.
It continues:
The least distortionary way to recover the fiscal costs of direct support would be by a ‘backward-looking’ charge, such as one based on historical balance sheet variables. This would define a fixed monetary amount that each institution would owe, to be paid over some specified period and subject to rules limiting the impact on net earnings.
Which is intriguing as this is an argument for direct and not indirect taxation. have the IMF seen the light at last on this issue?
On it goes:
Measures related to levies and taxes should: ensure that the financial sector meets the direct fiscal cost of any future support; make failures less likely and less damaging, most importantly by facilitating an effective resolution scheme; address any existing tax distortions at odds with financial stability concerns; be easy to implement, including in the degree of international coordination required; and, to the extent desired, require an additional fiscal contribution from the financial sector in recognition of the fact that the costs to countries of crises exceed the fiscal cost of direct support. A package of measures may be needed to attain these objectives. Measures that impose new costs on financial institutions will need to reflect and be coordinated with regulatory changes under consideration.
Again, this represents an enormous change: the emphasis is on international tax coordination — previously unknown and unthinkable.
As they then say:
After analyzing various options, this interim report proposes two forms of contribution from the financial sector, serving distinct purposes:
ÔÇ? A “Financial Stability Contribution” (FSC) linked to a credible and effective resolution mechanism. The main component of the FSC would be a levy to pay for the fiscal cost of any future government support to the sector. This component could either accumulate in a fund to facilitate the resolution of weak institutions or be paid into general revenue. The FSC would be paid by all financial institutions, with the levy rate initially flat, but refined over time to reflect institutions’ riskiness and contributions to systemic risk—such as those related to size, interconnectedness and substitutability—and variations in overall risk over time.
ÔÇ? Any further contribution from the financial sector that is desired should be raised by a “Financial Activities Tax” (FAT) levied on the sum of the profits and remuneration of financial institutions, and paid to general revenue. International cooperation would be beneficial, particularly in the context of crossborder financial institutions.
I have recommended both taxes here — and especially the latter in “Taxing Banks” — which went out on a limb on the issue of pay — and on this blog in saying, often, that banks should pay an extra 10% corporation tax.
Time and again I and the Tax Justice Network have emphasised the need for cooperation,. of course.
But there’s still more the IMF agrees with us on:
Unilateral actions by governments risk being undermined by tax and regulatory arbitrage.
Oh yes.
And this is amazing:
Effective cooperation does not require full uniformity, but broad agreement on the principles, including the bases and minimum rates of the FSC and FAT. Cooperative actions would promote a level playing field, especially for closely integrated markets, and greatly facilitate the resolution of cross-border institutions when needed.
A while ago we talked about a World tax organisation and people laughed. They won’t now.
But then add these too:
Actions are also needed to reduce current tax distortions that run counter to regulatory and stability objectives.
The pervasive tax bias in favor of debt finance (through the deductibility of interest but not the return to equity under most tax regimes) could be addressed by a range of reforms, as some countries already have done.
Both are essential. both are greatly aided by tax haven abuse.
But even more on tax havens follows:
Aggressive tax planning in the financial sector could be addressed more firmly.
I couldn’t agree more.
I’d add I also agree that:
More analysis will be undertaken to assess and refine these initial proposals.
Talk to us some more, I’d say.
But let’s not get euphoric. There’s nothing on bank losses. And amazingly financial transaction taxes have been ignored — incorrectly in my opinion. This reform needs an indirect tax component like a financial transaction tax. And we need country-by-country reporting to identify where bank profits are. Codes of Conduct are needed, and need to be enforced too.
But let’s welcome this as a first step. More is needed. But the IMF has listened to issues and moved into territory in which it will feel uncomfortable but in which it is welcome as a new player.
Now, let’s deliver it.
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Richard
I particularly like the bit about:
“Actions are also needed to reduce current tax distortions that run counter to regulatory and stability objectives.
“The pervasive tax bias in favor of debt finance (through the deductibility of interest but not the return to equity under most tax regimes) could be addressed by a range of reforms, as some countries already have done.”
The amount of debt held by fincos (excluding deposit and equity liabilities) makes the national debt (or any other class of debt for that matter) look like a picnic. It is against common sense, is morally indefensible, and against principles of basic sustainability that increased leverage in fincos continues to be exploited to inflate share price, bonuses etc, reduce tax liability, and extract real long-term shareholder value short-term. Whilst there are no figures collected by HMRC (why not?) back of the envelope calculations show that it is possible the amount of tax deducted outstrips the actual amount of tax paid.
A tax structure which continues to subsidise huge debt (and the few who are benefiting from it) while taxing the jobs and job creation of the many may create the illusion of growth in the short term but it is clearly harmful in the long run particularly if debt levels are uncontrained.
Best wishes
Well done, Richard. It is literally amazing to see a nightmare establishment behemoth like the IMF moving in the right direction. Your work has been part of creating the intellectual climate for that to become possible.
So Federal tax relief on mortgage interest payment only benefit a few! This is ridiculous; the Federal tax system massively subsidizes homeowners through mortgage, and that is a benefit enjoyed by a vast majority of the population.
@TedG tax relief on mortgage interest payments mostly benefit banks and real estate speculators. The subsidy bumps up the price. The banks get the extra rent and the speculators the capital gain.
@ Ted G
Interest payments on loans are tax-deductible for companies, but not for individuals or households in the UK; MIRAS (mortgage interest relief at source) was scrapped in April 2000. It didn’t stop people buying houses. It didn’t stop house prices rising in value.
A brief look at income tax and corporation tax revenues in the UK provides an interesting insight. Only twenty-five per cent of revenue is provided by corporations. Less than 7% of revenue is provided by financial corporations and banks. Given the vastly privileged treatment these business receives from successive UK governments, and the huge profits they make, this seems grotesquely unbalanced. It is not just, as has Richard has demonstrated time and again, that many of these corporations are rather good at avoiding tax, they are gifted an astronomically large tax avoidance scheme in the form of the tax deductibility of interest on debt.
Allowing interest on loans to businesses to be tax deductible encourages debt-fuelled business models and has contributed significantly to the growth in the leveraged buy-out market. The impact of this has been largely overlooked.
More and more over recent years debt has been used not just to finance acquisitions or growth but as a means of financial engineering, for example, for a leveraged buyout by a private equity house, or a recapitalisation which is then used to pay dividends to the owners. For the people managing private equity funds and for corporate executives this offers a beguiling and often rapid route to prosperity on the back of a mountain of debt, based on the savings of others and often to the longterm disadvantage of the businesses concerned. This is a direct result of the favoured tax treatment that corporate debt receives. In effect excess levels of debt are used to extract capital value from a company for the benefit of short term investors.
Given the levels of homeowner default in the US I would have thought it at least debatable that this level of homeowner debt is really a ‘benefit enjoyed by the vast majority of the population’; it certainly is not in the long term health and interests of a stable economy as the events of the last 18 months have proven.
Carol is right, and as Richard might say, you are wrong.
@Carol Wilcox
I respectfully disagree with this. Across the United States over 2/3rds of homes are owner-occupied. Most of these homes will serve as collateral for mortgage debt, or will have been acquired with a mortgage loan, now possibly repaid.
The Federal tax relief on mortgage has been a massive subsidy to all homeowners, which has allowed them to accumulate significant net-worth. Individual houses are the single most important item in household net-worth, well ahead of any financial assets (stocks, 401-k’s, etc.).
These are facts. Your fixation on banks is mis-informed.
@ Carol, that’s utter nonsense! In general, relief on mortgage interest payments just means people buy a more expensive house as they can afford a bigger mortgage. Therefore they benefit from living in a nicer or bigger house!
@Greg
No, Carol is 100% right
The evidence is absolutely clear – tax relief turns straight into house price increases and an increase in wealth disparities
TedG, Greg, you have no comprehension of the way the real estate/land market works. Any subsidy given to landowners always feeds into higher capital land values. When the basis of the CAP subsidy changed to acreage, agricultural land prices rose. MIRAS was reduced in stages so that the effect was not noticeable with other factors playing their part, i.e. interest rate and credit availability movements.
It is not the cost of bricks and mortar and building services which causes house price volatility but the land/location. If the full land rent were collected for public benefit, house prices would be reduced to reflect the value of the capital improvements alone and would be affordable for all.
@David Marks
It might be the case that the tax systems in smaller countries outside the US treat mortgage interest payment differently. But as I understand it, in the UK houses (at least main residences) are exempt from capital gains taxes. If this is the case, this special treatment is likely to act as a very powerful driver of house prices increase.
I would suggest you keep a sense of proportions: deliquencies in US residential mortgages remain extremely low, at most a few percentage points, and are heavily concentrated in the sub-prime segment. For every mortgage that has defaulted, well over 9 have remained current, so the overwhelming majority of mortgage borrowers continue to enjoy the benefit of a massive subsidy on interest payments, and of (at the moment) negative real base interest rates.
Your point about the leveraged buyout industry is a valid one, and worthy of intervention, although there is ample evidence (as Richard would say) that buyouts have an overall positive economic impact, in the form of more efficient businesses and better management.
Strong statement Richard, would you mind sharing this evidence.
@Ted G
Just go read the literature
I’m not your hand maiden
@Carol Wilcox
C’mon, this is not the 15th century anymore: America has been populated, we know how to measure longitude and we don’t bleed people anymore to cure the flu… among various other advances.
One of the thing we have learnt is that land and real estate prices are driven by complex economic and social factors: economic growth, monetary conditions, as well as demographics an urbanization all contribute to the pricing of real asset. To reduce everything down to a peculiarity of the tax code is simply not credible.
And what is that 1950’s post-marxist thing about “land rent for public benefit”?
@Ted G
Sorry Ted
You’re just showing your ignorance and I’ve had enough of that
Go read the literature on this
Learn something of what you’d like to talk about
Until then, not for the first time, you’re off her for time wasting.
And this debate is closed.