The bank tax fight

The International Monetary Fund has come forward with the latest proposal for the implementation of a global tax on the world's financial institutions as a way of paying for future bank bailouts.

The idea of a bank tax has attracted a lot of support in some quarters because it addresses a widespread public anger. People wonder why the very institutions that required public money to rescue them from their own recklessness are once again making big profits and paying huge bonuses to their executives.

Opponents — Canada among them — say it would be better to bring in tighter liquidity and capital measures that would prevent banks from making reckless bets in the first place.

What is the IMF's proposal?

The G20 asked the IMF to suggest ways it could stabilize the financial sector over the long term and make banks shoulder more of the cost of any future bailout. The IMF came back with a two-pronged bank tax proposal.

It calls for a levy on the balance sheets of all big banks — a Financial Stability Contribution — that would be used to cover the cost of future bailouts. That could raise up to $2 trillion US a year if all the G20 countries supported it (which they don't).

The IMF is also calling for a Financial Activities Tax — yes, a FAT tax — that would be imposed on bank earnings and compensation.

"Our belief is the tax system can help to reduce the likelihood of future crises," IMF head Dominique Strauss-Kahn says.

Are there other bank tax ideas?

The U.S. and many European countries are supporting various kinds of bank tax models.

The U.S., for instance, is advocating a Financial Crisis Responsibility Fee on bank debt to reduce risk-taking by the biggest and most highly leveraged financial institutions. It would be in effect for at least 10 years and is meant to repay the billions advanced to banks through TARP — the Troubled Asset Relief Program.

British Prime Minister Gordon Brown has endorsed the idea of a Tobin tax — first suggested by the Nobel economist James Tobin — that would tax financial transactions.

Britain and France have both announced confiscatory 50 per cent taxes on some financial industry bonuses above a certain level.

European finance ministers are endorsing some kind of bank tax, if not the specific IMF proposal.

"We are ready to co-operate with G20 members on globally co-ordinated principles for a levy on the financial sector," EU ministers said in a mid-April draft letter obtained by Reuters.

A diverse coalition of world leaders, non-governmental organizations, social activists and celebrities is pushing for a so-called Robin Hood Tax — a 0.05 per cent tax on all bank transactions that could raise hundreds of billions of dollars a year. That money would be earmarked, in part, for fighting poverty and climate change.

In all proposals, the tax revenue would be collected by the country involved.

Why is Canada fighting the idea of a bank tax?

Federal Finance Minister Jim Flaherty rejects any kind of global bank tax proposal.

"I'm not going to impose a tax on our banks that performed well during the financial crisis," he says.

"It seems to me a very odd thing to do — to punish our banks that got the job done adequately," he said, referring to the fact that Canada's banks did not require any public bailout.

The finance minister also says paying bank tax revenues into general revenue just invites deficit-plagued governments to dip into them. 

Flaherty has suggested to his G20 colleagues that they consider an alternate proposal put forward by Julie Dickson, Canada's superintendent of financial institutions. That calls for banks to self-insure by issuing debt that could be converted into equity if times got bad — a concept she calls "embedded contingent capital."    

Is Canada alone in opposing a bank tax?

Australia is also rejecting the IMF suggestion of a global bank tax, Like Canada, its taxpayers also didn't have to bail out their banks.

Japan's finance minister has recently been quoted as saying his country would not likely support a tax on banks.

Finance ministers and central bank chiefs from the G20 failed to agree on the idea of a global bank tax in Washington on April 23, and have put off the debate to late June when they meet in Toronto.

Can Canada be forced to bring in a bank tax? 

In a word, no. Even though the G20 has pledged to take co-ordinated action on bringing in uniform financial reforms, even the IMF acknowledges that individual countries are free to adopt their own financial policies.

Subsidiaries of Canadian banks operating in foreign jurisdictions, however, could be caught by bank tax measures imposed by those countries.