{
  "title": "Fair and Substantial—Taxing the Financial Sector",
  "publication": "IMF Blog, April 25, 2010",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2010/04/25/fair-and-substantial-taxing-the-financial-sector",
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  "summary": "IMF was asked by the G-20 to report on “... 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 burden associated with government interventions to repair the banking system.”",
  "sections": [
    {
      "heading": "Context and purpose",
      "content": "- IMF was asked by the G-20 to report on “... 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 burden associated with government interventions to repair the banking system.”\n- Objective: take a dispassionate, analytical view of options to raise money from the financial sector to pay for costs of government intervention and to reduce the likelihood and costliness of future crises.\n- Interim report prepared for G-20 finance ministers; to be revised for the June 2010 summit."
    },
    {
      "heading": "Key problems identified",
      "content": "- Governments lacked credible resolution mechanisms for large failing institutions, leaving only two unpalatable options: (1) let a systemic institution fail and bear chaotic fallout, or (2) provide public support, reinforcing “too big to fail.”\n- Resolution should mean equity holders wiped out, management replaced, and unsecured creditors take a loss—a process intended to reduce moral hazard.\n- Costs of the recent crisis (as estimated in the interim report):\n  - Direct support provided by governments: about 2.7 percent of GDP for the group of advanced G-20 countries.\n  - Guarantees and other contingent liabilities averaged around 25 percent of GDP for the advanced G-20.\n  - Cumulative loss of output of around 27 percent of GDP.\n- Indirect fiscal costs from recession and stimulus measures are also significant and contribute to surging public debt."
    },
    {
      "heading": "Proposed instruments and rationale",
      "content": "- Financial Stability Contribution (FSC)\n  - Purpose: ensure financial institutions bear the direct fiscal costs of future failures and to provide upfront cash for resolution to reduce uncertainty for creditors.\n  - Design features discussed:\n    - Start as a simple levy on some balance sheet (and possibly off-balance sheet) variables.\n    - Be refined to strengthen the link with each institution’s contribution to systemic risk to create incentives to reduce that risk.\n    - Be permanent (to maintain incentives until regulatory solutions are felt sufficient).\n    - Be paid by all financial institutions because all benefit from greater financial stability and the resolution mechanism.\n  - Treatment of revenue:\n    - Whether revenue is treated as general tax revenue or fed to an earmarked fund is considered secondary for fiscal impact, though a fund could assure ready access for the resolution agency.\n  - Interaction with “ex post” charges: FSC would provide upfront funds, with amounts topped up if needed by ex post charges (analogous to the Financial Crisis Responsibility fee proposed in the United States).\n\n- Financial Activities Tax (FAT)\n  - Definition: a tax on the sum of the profits and remuneration paid by financial institutions.\n  - Economic logic:\n    - Profits plus all remuneration equals value added, so a FAT is akin to a Value-Added Tax (VAT).\n    - Because financial services are largely VAT-exempt, a FAT could make tax treatment of the financial sector more like other sectors and counteract any tax-driven tendency for the financial sector to be “too large.”\n    - If the base includes only remuneration above some high level and profits above a “normal” rate of return, the FAT could approximate a tax on “rents” (returns in excess of competitive levels).\n    - Taxing high returns in good times may correct incentives that lead to excessive risk-taking if institutions underweight bad outcomes.\n\n- Financial Transactions Tax (FTT)\n  - Definition: a tax paid each time a share, bond, other financial instrument, and/or foreign currency is bought or sold.\n  - Assessment in interim report:\n    - Some forms of FTT may be feasible and many G-20 countries already tax some financial transactions.\n    - FTT is not focused on reducing systemic risk and is not effective at taxing rents in the financial sector; much of the burden may fall on ordinary consumers.\n    - The financial industry can devise schemes to get around such a tax (also a concern for FSC and FAT, but suspected to be less severe).\n    - Analogy: FAT is like a VAT; FTT is like a turnover tax — VAT generally more efficient at raising revenue than turnover taxes.\n    - Conclusion: FTT is not the most effective way to meet the two key objectives (ensure industry bears future fiscal costs; make events less likely and less costly), though it is not ruled out in other contexts."
    },
    {
      "heading": "Distributional and international considerations",
      "content": "- Countries that did not require large rescues may be reluctant to impose additional charges on their financial sectors.\n- Concern about tax and regulatory arbitrage across jurisdictions if some countries act and others do not.\n- Counterpoints:\n  - No country is immune from failures and crises.\n  - If FSC is properly risk-adjusted, countries with safer systems would face smaller contributions.\n  - Avoid imposing such heavy burdens that they repress the financial sector and harm economic growth; the financial sector provides many beneficial services."
    },
    {
      "heading": "Policy priorities and next steps",
      "content": "- Core priorities:\n  - Create credible resolution mechanisms so owners and managers bear losses and moral hazard is reduced.\n  - Ensure the financial sector contributes to the cost of resolution and crisis prevention through instruments like the FSC and FAT, with careful design to target systemic risk and rents.\n  - Coordinate tax initiatives with regulatory reforms.\n- Process:\n  - The IMF will revise the interim report for the June summit based on G-20 finance ministers’ discussions.\n  - IMF will continue to listen to stakeholders and conduct further number-crunching to refine options and assess interactions with regulatory measures.\n- Overarching aim: reduce the risk, and costliness, of future financial failures.\n\nIMF blog post by Carlo Cottarelli, April 25, 2010.\n\n---\n\n\nSource: https://www.imf.org/en/blogs/articles/2010/04/25/fair-and-substantial-taxing-the-financial-sector"
    }
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    "Authors: Carlo Cottarelli",
    "Published: April 25, 2010",
    "IMF was asked by the G-20 to report on “... 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 burden associated with government interventions to repair the banking system.”",
    "Objective: take a dispassionate, analytical view of options to raise money from the financial sector to pay for costs of government intervention and to reduce the likelihood and costliness of future crises.",
    "Interim report prepared for G-20 finance ministers; to be revised for the June 2010 summit.",
    "Governments lacked credible resolution mechanisms for large failing institutions, leaving only two unpalatable options: (1) let a systemic institution fail and bear chaotic fallout, or (2) provide public support, reinforcing “too big to fail.”",
    "Resolution should mean equity holders wiped out, management replaced, and unsecured creditors take a loss—a process intended to reduce moral hazard.",
    "Costs of the recent crisis (as estimated in the interim report):",
    "Indirect fiscal costs from recession and stimulus measures are also significant and contribute to surging public debt.",
    "Financial Stability Contribution (FSC)",
    "Financial Activities Tax (FAT)",
    "Financial Transactions Tax (FTT)",
    "Countries that did not require large rescues may be reluctant to impose additional charges on their financial sectors.",
    "Concern about tax and regulatory arbitrage across jurisdictions if some countries act and others do not.",
    "Counterpoints:",
    "Core priorities:",
    "Process:",
    "Overarching aim: reduce the risk, and costliness, of future financial failures."
  ],
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