This is my latest column in Forbes:
The International Monetary Fund's proposal that there should be two new taxes charged on banks to ensure that they contribute fairly to compensate the risk they impose on the rest of society in future caught almost everyone by surprise this week.
The first proposal, called a Financial Stability Contribution (FSC), is designed to raise a reserve fund to bail out any failing institution before it can topple the whole world financial system, Lehman style. The IMF target is for a fund worth between 2% and 4% of a country¬?s GDP. On a worldwide basis that will result in a fund of nearly $2 trillion. Raised over ten years that¬?s a cool target of some $200 billion a year.
The second aim is to impose a Financial Activities Tax (FAT). This will be due as an additional tax on bank profits and bankers' pay. I estimate each element could raise maybe $35 billion a year worldwide, assuming an extra 10% tax rate on banks and a bonus tax similar to that adopted by the UK in 2009.
All told that¬?s a significant additional tax charge of almost 0.5% of world GDP a year, despite which it fails to meet the demand from civil society that some form of financial transaction taxes be added into the mix to fund development and climate change projects as well. If this were to be done as well it would tip the total revenues to well over $300 billion a year.
Two questions arise, though. The first is whether this is likely to win support? The second is whether such taxes are likely to be enforceable? Of the two the second is easier to address.
Both taxes the IMF proposes will present considerable collection difficulties. The FSC is to be a charge on the liabilities on a financial institution¬?s balance sheet. The difficulty is that no one can yet agree what the valuation basis for bank liabilities is, so accounting will have to move on a long way before a level playing field will be created in charging the tax. Secondly, off balance sheet accounting remains far too commonplace as, meaning near insurmountable problems exist in determining just what the basis for charging this tax will be. Finally, and rather importantly, someone will need to find the appropriate balance sheets before they can be taxed and many are located in tax havens. All suggest real problems ahead for the IMF plan.
The FAT faces almost as many problems. The biggest problem is even if banks start making profits again they have an enormous pile of tax losses available to offset against them as a result of the crisis of the last couple of years. This means that taxable profits are going to be in short supply in banks for some time to come. Second, banks will, almost certainly, contract out payroll costs if additional taxes are imposed on them. This will then save them tax. Third, there remains the problem of offshore.
Unsurprisingly as a result the IMF suggests international cooperation will be desirable to make these taxes work. Canada has already indicated a lack of willingness to support the measures though. As a result a smooth ride is by no means guaranteed, even if the new measures would seem to meet the requirements of the Obama administration.
That though may not be the real issue here. That real issue may be subliminal right now, and yet fundamental. Never before has a body like the IMF talked about coordinating tax rates, agreeing on common taxes bases or establishing methods on tax cooperation of this sort before.
As a result maybe, just maybe, the real IMF aim is not to tackle banks, however useful that might be, but to restore government balance sheets by raising revenue through tax cooperation and so keep those same governments from knocking on the IMF¬?s door for a bail out.
Whichever goal is right, and whatever taxes are involved two things are certain: news taxes are on their way and some countries will be cooperating to ensure they are effective. This is the new world we live in. Get used to it, now.