The International Monetary Fund has
recommended two forms of taxation of financial institutions to prevent and fund
future financial crises.
An IMF staff report titled “A fair
and substantial contribution by the financial sector” recommends the G20 should
implement a financial stability contribution to cover the cost of future bank
The two recommended global taxes
consist of a general levy on financial institutions and a tax on profits and
The taxes would apply to all
financial institutions, including banks, insurers and hedge funds.
The IMF report was produced in
response to a G20 request for analysis of the range of options countries have adopted or are
considering to force the financial sector to make a “fair and substantial contribution”
to alleviate the burden on governments from repairing the global financial
IMF estimates the average cost of direct government intervention in the banking
sector to be 2.7 per cent of GDP for the advanced G20 countries. In the most
affected countries unrecovered costs are as a high as 4-5 per cent of GDP, the
IMF report said.
Several governments have in the
past announced plans to introduce fees on banks to fund the costs caused by the
the crisis the US has proposed a financial crisis responsibility fee to recover
intervention costs, whereas the UK and France have introduced temporary bonus
taxes. Others have floated the idea of a general tax on financial transactions.
so far most governments have been reluctant to impose a
levy unilaterally, mainly because “governments risk being undermined by tax and regulatory arbitrage,”
the report said.
the complexity of cross-border financial institutions, international cooperation
would therefore be beneficial.
cover and contain direct fiscal costs of any financial sector failures the IMF
proposes two global taxes.
general levy, named the “financial stability contribution”, would start at
a flat rate but would eventually be adjusted according to the riskiness of the
business and its contribution to systemic risk, for example due to its size.
FSC would ensure that the industry helps meet the costs of any potential
resolution and would reduce systemic risk,” the IMF report said. ”If designed
properly, resolution mechanisms will avoid governments in the future being
forced to bail out institutions deemed too important, too big, or too
interconnected to fail.”
contributions, should they be necessary, could be raised through a “financial
activities tax”, which would be levied on the sum of the profits and remuneration
of financial institutions, according to the report.
report also called for action with regard to current tax distortions that
adversely affect regulatory and stability objectives, specifically mentioning
the tax bias in favour of debt finance.
Aggressive tax planning in the financial
sector could also be addressed more firmly, “perhaps building on the cooperation
established in relation to tax havens,” the IMF said.
The Monetary Fund said more
analysis is needed to refine the proposals.
The requirements for the measures will
be that they should be easy to implement, reflect the wider fiscal and economic
costs of financial crises and address the problem of tax distortions, while
taking into account the overall burden of regulation and taxation on the
Final recommendations will be
presented to the meeting of G20 leaders in Toronto in June.