UPDATE 3-IMF proposes two new bank taxes to fund bailouts

Tue Apr 20, 2010 7:29pm EDT

(Adds background on G20, Darling quotes)

By Sumeet Desai

LONDON, April 20 (Reuters) - Banks worldwide face the threat of new taxes to cover the cost of any future bailouts, including one on profits which have outraged taxpayers, under proposals by the IMF circulated to the Group of 20 leading developed and emerging market countries on Tuesday.

British finance minister Alistair Darling welcomed the IMF report, saying financial institutions have to pay something back to the societies in which they operate.

Bank lobbying groups, however, said they were concerned that new taxes could damage competitiveness.

"We want proposals agreed as soon as possible," said Darling, who is scheduled to attend a meeting of G20 finance ministers and central bankers on the sidelines of an International Monetary Fund meeting in Washington on April 22-23.

"I think there's every chance of getting an agreement. It may not be in the exact shape or form of what the IMF are saying," Darling told the BBC's Newsnight program.

Any agreement this week remains unlikely, not least because it was unclear whether European delegations would make it to the IMF/World Bank meetings in Washington given flying restrictions caused by a volcanic ash cloud, though European airports had begun to return to life on Tuesday.

First proposed by British Prime Minister Gordon Brown last November, support for a global levy has been gaining traction in Europe and the United States as politicians try to appease public anger and find a way to recoup the costs of trillion-dollar bailouts.

Canada, for one, remains opposed.

U.S. President Barack Obama has proposed a $90 billion tax on big banks designed to recoup taxpayer costs associated with the $700 billion government bailout of the U.S. financial system.

FAT CATS EYED

The IMF said this was just an interim report and a final version would be presented to G20 leaders in June.

The IMF estimated that the current crisis cost G20 countries about 2.7 percent of GDP, but was higher for countries like the United States where the crisis emanated from.

The report, made available on the BBC's website on Tuesday, proposes a "Financial Stability Contribution," which would be used to cover the cost of any future financial sector bailouts to ensure that taxpayers will never again have to shell out trillions of dollars to keep banks in business.

Although initially a permanent charge, the tax could be reviewed periodically as countries refine their respective regulatory measures.

Most likely, the revenue collected would be paid into a fund that could end up being somewhere between 2 to 4 percent of a country's gross domestic product. In the case of the United States, about 2 percent of GDP would translate into about $300 billion.

The IMF also left the door open for the tax revenue to go directly into national budgets.

All financial institutions would have to pay, initially at a flat rate. The levy could be refined over time to make most risky organizations pay proportionately more.

The IMF also proposed a further tax on the financial sector designed to pick up additional revenue, which recognizes that banks benefit from being part of a wider society -- an alternative to calls in some quarters for a so-called Tobin tax imposed on transactions.

The "Financial Activities Tax" (FAT) -- or a fat cat tax -- would be levied on the sum of the profits and remuneration of financial institutions and paid into national budgets.

Precisely how countries define profits and remuneration for such a tax could determine its economic impact. A source said it could raise amounts equivalent to about 0.2 percent to 0.4 percent of gross domestic product.

The taxes would apply not only to countries hit worst by the financial crisis, such as the United States, but also to those outside the G20.

"All taxes have an impact and more tax has more impact," said a spokesman for the British Bankers' Association. "The recommendations need to be carefully examined, but we remain concerned about moves which could place the UK industry at a competitive disadvantage."

TARGETING BANKERS

The IMF stressed that international cooperation was important and Darling stressed that any bank levy had to be global in order to prevent regulatory arbitrage.

But politicians everywhere know that people are angry with bankers and in many cases blame them for the financial crisis that has cost millions of jobs and sent thousands of businesses to the wall.

In Britain, after a decade in which the City of London financial sector was held up as a beacon of excellence, the crisis and ensuing recession has meant that bankers are an easy target in the country's increasingly unpredictable election campaign.

With polling day on May 6, both main parties have been vying to appear tough on bankers and on Tuesday rushed to welcome the IMF proposals and take credit for leading the way.

Aid groups reacted positively, and the proposals are likely to tap into the bank-bashing mood prevailing over much of the world in the wake of the financial crisis.

"The IMF has given a green light to taxing banks, which is positive. We need to see hundreds of millions of dollars every year going to fight poverty and climate change," said Oxfam spokeswoman Elizabeth Stuart.

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