When the Group of 20 nations (G-20) meets in Washington this week, it will consider an International Monetary Fund (IMF) proposal to tax financial companies to recoup bailout costs resulting from the crisis. Bloomberg reports that the IMF's recommendation is for non-deposit liabilities or profits and compensation to be taxed -- not financial transactions. How will the nations react?
It's fairly likely that some will embrace the proposal. Great Britain and France have already adopted such measures. Canada, however, rejected a global bank tax. In the U.S., the fate of such a tax is unclear. President Obama supports a punitive bank tax, but Congress hasn't been as willing to go along.
In the U.S. it could also depend on the details. Such a tax would likely be less controversial if it took the form of a tax on non-deposit liabilities instead of profits and compensation. That way, it would target risk instead of success. Washington arguing that big banks should pay for the bailout is something of a hard sell, since they have all paid back their bailout money. Any cost related to the bailout will likely result from AIG, the auto companies, smaller banks and the Treasury's mortgage modification program.
A bank tax should also be considered in the context of financial reform. The Dodd proposal essentially calls for a preemptive bank tax, administered as an assessment to pay for a fund which would be used to resolve large institutions that fail. The proposal, however, is also very controversial and remains one of the major sticking points in the financial reform battle.
The IMF's suggestion will make for an interesting aspect of the G-20's meeting to keep an eye on. The nations will likely be divided, given what we know from their previous actions explained above. But the G-20 could still issue some fuzzy language supporting the idea of a bank tax. That's what it did back in September when it endorsed financial compensation guidelines, but failed to put in place specific rules or an enforcement mechanism.
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