All for One Tax and One Tax for All?

The IMF recently proposed a new global tax on financial institutions loosely in proportion to their size, as well as a tax on banks’ profits and bonuses. The proposal has been greeted with predictable disdain and derision by the financial industry, but, as a diagnosis of the problem that needs to be fixed, the Fund gets more right than it does wrong.

CAMBRIDGE – When the next full-scale global financial crisis hits, let it not be said that the International Monetary Fund never took a stab at forestalling it. Recently, the IMF proposed a new global tax on financial institutions loosely in proportion to their size, as well as a tax on banks’ profits and bonuses.

The Fund’s proposal has been greeted with predictable disdain and derision by the financial industry. More interesting and significant are the mixed reviews from G-20 presidents and finance ministers. Governments at the epicenter of the recent financial crisis, especially the United States and the United Kingdom, are downright enthusiastic, particularly about the tax on size. After all, they want to do that anyway. Countries that did not experience recent bank meltdowns, such as Canada, Australia, China, Brazil, and India, are unenthusiastic. Why should they change systems that proved so resilient?

It is all too easy to criticize the specifics of the IMF plan. But the IMF’s big-picture diagnosis of the problem gets a lot right. Financial systems are bloated by implicit taxpayer guarantees, which allow banks, particularly large ones, to borrow money at interest rates that do not fully reflect the risks they take in search of outsized profits. Since that risk is then passed on to taxpayers, imposing taxes on financial firms in proportion to their borrowing is a simple way to ensure fairness.

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