Bank tax
Encyclopedia
A bank tax is a tax
on bank
s. One of the earliest modern uses of the term "bank tax" occurred in the context of the Financial crisis of 2007–2010.
On 16 April 2010, the International Monetary Fund
(IMF) proposed the idea of a "financial stability contribution" (FSC), which many media have referred to as a "bank tax." It was proposed as one of three possible options to deal with the crisis. These options were presented in response to an earlier request of the G-20 leaders, at the September 2009 Pittsburgh summit
, for an investigative report on all possible options to deal with the crisis.
Both before and after that IMF report, there was considerable debate amongst national leaders as to whether such a "bank tax" should be global or semi-global, or whether it should be applied only in certain nations.
chairman Lord Adair Turner said in Prospect magazine
that he would be happy to consider a "tax on banks" to prevent excessive bonus payments.
, the G20 nation leaders asked the IMF "to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."
Much of the IMF’s report is devoted to the first option of a levy on all major financial institutions balance sheets. Initially it could be imposed at a flat rate and later it could be refined so that the institutions with the most risky portfolios would pay more than those who took on fewer risks. Such a levy could be modeled on President Obama’s proposed Financial Crisis Responsibility Fee
that would raise US$90 billion over 10 years from US banks with assets of more than US$50 billion. If Obama’s proposal is approved by the US Congress, the proceeds would go into general government revenues. They would be used to pay the costs of the current crisis rather than go into an insurance fund in anticipation of the next one.
In November 2009, (two months after the 2009 G-20 Pittsburgh summit of heads of state
), the G20 nation Finance Ministers met in Scotland to address the Financial crisis of 2007–2010. However, they were unwilling to endorse the German proposal for a Financial Transactions Tax:
While the IMF does not endorse an FTT, it concedes that "The FTT should not be dismissed on grounds of administrative practicality."
A "bank tax" ("bank levy) is distinct from a financial transaction tax
in the following way:
A financial transaction tax
is a tax
placed on a specific type (or types) of financial transaction
for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption tax
es paid by consumer
s. However, it is not a taxing of the financial institution
s themselves. Instead, it is charged only on the specific transactions that are designated as taxable. If an institution never carries out the taxable transaction, then it will never be taxed on that transaction. Furthermore, if it carries out only one such transaction, then it will only be taxed for that one transaction. As such, this tax is neither a financial activities tax, nor a "bank tax," for example. This clarification is important in discussions about using a financial transaction tax
as a tool to selectively discourage excessive speculation
without discouraging any other activity (as Keynes originally envisioned it in the 1936. )
, the G20 leaders declared that a "global tax" was no longer "on the table," but that individual countries will be able to decide whether to implement a levy against financial institutions to recoup billions of dollars in taxpayer-funded bailouts.
Nevertheless Britain, France and Germany had already agreed before the summit to impose a "bank tax." On May 20, 2010, German officials were understood to favour a financial transaction tax
over a financial activities tax.
after G20 leaders failed to agree on the issue.
The financial transactions tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. EU leaders instructed their finance ministers in May 2010 to work out by the end of October 2010, details for the banking levy, but any financial transaction tax
remains much more controversial.
chairman Lord Adair Turner had said it was "ridiculous" to think he would propose a new tax on London and not the rest of the world. However, in May, and June 2010, the government of Canada expressed opposition to the bank tax becoming "global" in nature.
In an alternative critique of the IMF's stance, Aldo Caliari of U.S. NGO the Center of Concern said, "the naiveté with which the IMF approaches its preferred mechanism—a bank tax tied to systemic risks—is astonishing for such a knowledgeable institution, unless it is in fact designed to let the financial sector off the hook." He argues that the FAT and FSC do not reduce the overall risk in the system, and may increase it if banks are encouraged to feel that the taxes provide a government guarantee of future bailouts. Nonetheless, a 2010 Tulane Law Review
article lent lukewarm support to President Obama's Financial Crisis Responsibility Fee
, which is a "bank tax" similar to the FSC. The Tulane article concluded that taxing financial transactions would be "foolish", and that a bank tax "could constitute shrewd regulatory reform if done properly."
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
on bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s. One of the earliest modern uses of the term "bank tax" occurred in the context of the Financial crisis of 2007–2010.
On 16 April 2010, the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) proposed the idea of a "financial stability contribution" (FSC), which many media have referred to as a "bank tax." It was proposed as one of three possible options to deal with the crisis. These options were presented in response to an earlier request of the G-20 leaders, at the September 2009 Pittsburgh summit
2009 G-20 Pittsburgh summit
The 2009 G-20 Pittsburgh Summit was the third meeting of the G-20 heads of state in discussion of financial markets and the world economy.The G-20 is the premier forum for discussing, planning and monitoring international economiccooperation....
, for an investigative report on all possible options to deal with the crisis.
Both before and after that IMF report, there was considerable debate amongst national leaders as to whether such a "bank tax" should be global or semi-global, or whether it should be applied only in certain nations.
History
In the context of the Financial crisis of 2007–2010, in August 2009, British Financial Services AuthorityFinancial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
chairman Lord Adair Turner said in Prospect magazine
Prospect (magazine)
Prospect is a monthly British general interest magazine, specialising in politics and current affairs. Frequent topics include British, European, and US politics, social issues, art, literature, cinema, science, the media, history, philosophy, and psychology...
that he would be happy to consider a "tax on banks" to prevent excessive bonus payments.
G20 request to IMF
At the September 2009 G-20 Pittsburgh summit2009 G-20 Pittsburgh summit
The 2009 G-20 Pittsburgh Summit was the third meeting of the G-20 heads of state in discussion of financial markets and the world economy.The G-20 is the premier forum for discussing, planning and monitoring international economiccooperation....
, the G20 nation leaders asked the IMF "to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."
IMF responds to G20 request
When the IMF presented its interim report for the G20 on April 16, 2010, it laid out the following three options. Notice that they are all distinct from each other:1. Financial stability contribution (FSC), or "Bank tax"
- Financial stability contribution (FSC) , or "Bank tax," or "Bank Levy," – a tax on financial institutions’ balance sheets (most probably on their liabilities or possibly on their assets) whose proceeds would most likely be used to create an insurance fund to bail them out in any future crisis rather than making taxpayers pay for bailouts.
Much of the IMF’s report is devoted to the first option of a levy on all major financial institutions balance sheets. Initially it could be imposed at a flat rate and later it could be refined so that the institutions with the most risky portfolios would pay more than those who took on fewer risks. Such a levy could be modeled on President Obama’s proposed Financial Crisis Responsibility Fee
Financial Crisis Responsibility Fee
The Financial Crisis Responsibility Fee is a proposed tax by U.S. President Barack Obama which would act upon certain financial firms, being imposed until that financial firm had paid off all money provided to it under the Troubled Assets Relief Program. It was proposed in January 2010. The tax...
that would raise US$90 billion over 10 years from US banks with assets of more than US$50 billion. If Obama’s proposal is approved by the US Congress, the proceeds would go into general government revenues. They would be used to pay the costs of the current crisis rather than go into an insurance fund in anticipation of the next one.
2. Financial Activities Tax (FAT)
- A Financial Activities Tax or FAT – raised on the sum of bank profits and bankers’ remuneration packages with the proceeds going into general government revenues.
3. Financial Transaction Tax
- A Financial Transactions Tax (FTT) – on a broad range of financial instruments including stocks, bonds, currencies and derivatives.
In November 2009, (two months after the 2009 G-20 Pittsburgh summit of heads of state
2009 G-20 Pittsburgh summit
The 2009 G-20 Pittsburgh Summit was the third meeting of the G-20 heads of state in discussion of financial markets and the world economy.The G-20 is the premier forum for discussing, planning and monitoring international economiccooperation....
), the G20 nation Finance Ministers met in Scotland to address the Financial crisis of 2007–2010. However, they were unwilling to endorse the German proposal for a Financial Transactions Tax:
"European Union leaders urged the International Monetary Fund on Friday to consider a global tax on financial transactions in spite of opposition from the US and doubts at the IMF itself. In a communiqué issued after a two-day summit, the EU’s 27 national leaders stopped short of making a formal appeal for the introduction of a so-called "Tobin taxTobin taxA Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
" but made clear they regarded it as a potentially useful revenue-raising instrument."
While the IMF does not endorse an FTT, it concedes that "The FTT should not be dismissed on grounds of administrative practicality."
The difference between a Bank Tax and a Financial Transaction Tax
A "bank tax" ("bank levy) is distinct from a financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
in the following way:
A financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
is a tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
placed on a specific type (or types) of financial transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption tax
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...
es paid by consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s. However, it is not a taxing of the financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s themselves. Instead, it is charged only on the specific transactions that are designated as taxable. If an institution never carries out the taxable transaction, then it will never be taxed on that transaction. Furthermore, if it carries out only one such transaction, then it will only be taxed for that one transaction. As such, this tax is neither a financial activities tax, nor a "bank tax," for example. This clarification is important in discussions about using a financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
as a tool to selectively discourage excessive speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
without discouraging any other activity (as Keynes originally envisioned it in the 1936. )
Aftermath to IMF report
On June 27, 2010 at the 2010 G-20 Toronto summit2010 G-20 Toronto summit
The 2010 G-20 Toronto summit was the fourth meeting of the G-20 heads of government, in discussion of the global financial system and the world economy, which took place at the Metro Toronto Convention Centre in Toronto, Ontario, Canada, during June 26–27, 2010...
, the G20 leaders declared that a "global tax" was no longer "on the table," but that individual countries will be able to decide whether to implement a levy against financial institutions to recoup billions of dollars in taxpayer-funded bailouts.
Nevertheless Britain, France and Germany had already agreed before the summit to impose a "bank tax." On May 20, 2010, German officials were understood to favour a financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
over a financial activities tax.
Two simultaneous taxes considered in the European Union
On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactionsFinancial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
after G20 leaders failed to agree on the issue.
The financial transactions tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. EU leaders instructed their finance ministers in May 2010 to work out by the end of October 2010, details for the banking levy, but any financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
remains much more controversial.
Should the bank tax be global?
On August 30, 2009, British Financial Services AuthorityFinancial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
chairman Lord Adair Turner had said it was "ridiculous" to think he would propose a new tax on London and not the rest of the world. However, in May, and June 2010, the government of Canada expressed opposition to the bank tax becoming "global" in nature.
Controversy over the IMF's refusal to promote a financial-transactions tax
In a detailed analysis of the IMF’s proposals, Stephan Schulmeister of the Austrian Institute of Economic Research finds that, "the assertion of the IMF paper, that [a financial-transactions tax] ‘is not focused on the core sources of financial instability,’ does not seem to have a solid foundation in the empirical evidence." Yet at least one independent commentator has endorsed the IMF's view.In an alternative critique of the IMF's stance, Aldo Caliari of U.S. NGO the Center of Concern said, "the naiveté with which the IMF approaches its preferred mechanism—a bank tax tied to systemic risks—is astonishing for such a knowledgeable institution, unless it is in fact designed to let the financial sector off the hook." He argues that the FAT and FSC do not reduce the overall risk in the system, and may increase it if banks are encouraged to feel that the taxes provide a government guarantee of future bailouts. Nonetheless, a 2010 Tulane Law Review
Tulane Law Review
The Tulane Law Review, a publication of the Tulane University Law School, was founded in 1916, and is currently published six times annually. The Law Review has an international circulation and is one of few American law reviews carried by law libraries in the United Kingdom.-History:The Law Review...
article lent lukewarm support to President Obama's Financial Crisis Responsibility Fee
Financial Crisis Responsibility Fee
The Financial Crisis Responsibility Fee is a proposed tax by U.S. President Barack Obama which would act upon certain financial firms, being imposed until that financial firm had paid off all money provided to it under the Troubled Assets Relief Program. It was proposed in January 2010. The tax...
, which is a "bank tax" similar to the FSC. The Tulane article concluded that taxing financial transactions would be "foolish", and that a bank tax "could constitute shrewd regulatory reform if done properly."
See also
- Financial Crisis Responsibility FeeFinancial Crisis Responsibility FeeThe Financial Crisis Responsibility Fee is a proposed tax by U.S. President Barack Obama which would act upon certain financial firms, being imposed until that financial firm had paid off all money provided to it under the Troubled Assets Relief Program. It was proposed in January 2010. The tax...
- BankBankA bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
- Currency transaction taxCurrency transaction taxA currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers....
- Financial transaction taxFinancial transaction taxA financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
- List of G-20 summits
- Robin Hood taxRobin Hood taxThe Robin Hood tax commonly refers to a package of financial transaction taxes , proposed by a campaigning group of civil society NGOs. Campaigners have suggested the tax could be implemented globally, regionally or unilaterally by individual nations...
- Spahn taxSpahn taxA Spahn tax is a type of currency transaction tax that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by Paul Bernd Spahn in 1995.-Early history:...
- TaxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
- Tobin taxTobin taxA Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
- Transfer taxTransfer taxA transfer tax is a tax on the passing of title to property from one person to another.In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to property. This kind of tax is typically imposed where there is a legal requirement for registration of...