IMF Proposes Bank Taxes

Dominique Strauss-Kahn

Dominique Strauss-Kahn

This PDF contains a set of recommendations from the IMF for technically feasible ways of taxing financial institutions to make up for the enormous social cost of the bursting bubble. It would, as they note, be strongly desirable to see international coordination toward those goals:

A “Financial Stability Contribution” (FSC) linked to a credible and effective resolution mechanism. The main component of the FSC would be a levy to pay for the fiscal cost of any future government support to the sector. This component could either accumulate in a fund to facilitate the resolution of weak institutions or be paid into general revenue. The FSC would be paid by all financial institutions, with the levy rate initially flat, but refined over time to reflect institutions’ riskiness and contributions to systemic risk—such as those related to size, interconnectedness and substitutability—and variations in overall risk over time.

Any further contribution from the financial sector that is desired should be raised by a “Financial Activities Tax” (FAT) levied on the sum of the profits and remuneration of financial institutions, and paid to general revenue.

A separate crucial point the report makes is that it’s a huge mistake to think of the cost of the financial crisis primarily in terms of the fiscal cost of various rescue measures. In strict budgetary terms, the net fiscal cost is likely to be quite low—most of the funds will be repaid. The real costs are the broader social and economic costs of the collapse. Focusing on the budgetary cost of rescue measures leads us to simultaneously understate the cost of the crisis while overstating the price of the rescue measures.

At any rate, I got this all via Mark Kleiman who made a joke about the IMF staff surely not being “a bunch of committed socialists.” It’s perhaps worth noting that the IMF is, in fact, headed by a French Socialist, Dominique Strauss-Kahn, Finance Minister in Lionel Jospin’s “plural left” government and a leading contender for the presidency in 2012. I point that out not just to be pedantic, but also because I think the tick of saying “look at this idea, you can know it’s correct because rightwingers like it” is a bit odd and counterproductive. When institutions headed up by center-left folks come up with good ideas, we should be giving them credit where due.