Ask an Economist: IMF Supports Some Financial Taxes

Ilene Grabel

Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. See all of the questions and answers here. A reader asked:

Q: The Financial Transfer Tax (FTT) has received a lot of notice in Europe but few mainstream economists in the US are engaging the issue. Is the FTT a realistic option and is it feasible?  How could it be implemented?  Is the IMF likely to include it in the paper they are preparing for the G20 on options to pay for the economic crisis?

Grabel: Many progressive economists and civil society organizations have come out in favor of a FTT. For example, on this blog, see discussion and references to studies of FTTs, and also see the discussion of a recent study of a FTT referenced in the Bretton Woods Update.

However, an IMF report (prepared as an interim report for the G-20) that was made available just yesterday on the BBC website reveals that the Fund is not throwing support behind a FTT, as many progressives hoped it would.  (See the IMF’s analysis of a FTT on pp. 15-18 of the interim report. The assessment it offers of a FTT seems far more measured than what we might have expected of the Fund, not least because it does not dismiss FTTs as being infeasible on grounds of administrative impracticality, a usual criticism of this policy.)

This same interim IMF report does propose two other kinds of taxes on financial firms that should cause progressives to be pleased.  Under the proposal, all financial institutions would pay a “Financial Stability Contribution” which is a bank levy (initially at a flat rate), and a “Financial Activity Tax,” which would be a tax levied on the profits and pay of financial institutions. These measures are designed to make banks shoulder at least some of the costs of future financial and economic rescue packages.

Robert Preston, BBC Economics Editor says of these proposals, “The proposals are likely to horrify banks, especially the proposed tax on pay.”  In my view, not exactly your grandfather’s IMF.  This shows again that despite the many reasons why we might still press the IMF for change in many dimensions, some of the ideas promoted by the institution are in fact changing — even if change is uneven, slow, and comes in fits and starts.

(Relatedly: see also my response to another question posed in the “Ask an economist” feature:  Absolute poverty and increasing inequality remain serious issues in spite of WB/IMF development loans, even in countries with high economic growth…..? How can these organizations take steps to move away from the ideology of neo-liberalism towards developing scientifically-based economic policies that are pro-poor?”)