Bank Tax : Imf Fumbles, Politicians Find a Distraction

If a man dies in your neighbourhood from an unknown disease, what should the people do ? Should they begin in right earnest to have the illness diagnosed and find a way of preventing it from affecting someone else, or should they begin preparing for the next funeral with the expectation that the illness will recur and claim another life ?

Politicians fall back on IMF

Unfortunately, it is the latter option that seems to be materializing in the form of a Bank Tax. Instead of attempting to understand what happened in the subprime defaults that cascaded into a global crisis, politicians in United States and Europe are more interested in finding a scapegoat to which can be directed the anger of the citizens bearing the brunt of bailout measures being undertaken there. IMF estimates that the Governments in advanced G-20 economies have spent or pledged over 2 trillion dollars for dealing with global economic crisis, and the cost of this generous booty will have to be borne by the taxpayer in the end. The Bank Tax has thus become the primary means of dousing the growing wrath of common man, and also become a signal of Government’s intentions of punishing the financial institutions which were primarily responsible for the crisis.

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On request of some of the leading politicians of G-20 countries, IMF has come out with a 57 page report, wherein it proposed two forms of Bank Taxes – first, a levy on financial institutions and second, taxes on financial activities, and had justified them as a means of financing any future crisis with the hope that the cost of next such crisis will not need to be borne by the taxpayers. Unfortunately, in this attempt to use economics for the purpose of political convenience, the report has become a mockery. It is self contradictory, vague, highly confused and most importantly, without any theoretical support. Understanding even some of those shortcomings could make a reader realise the great folly IMF has made this time – perhaps its greatest error of judgment ever since its prescriptions given in the Asian Financial Crisis of 1997.

The first error : Bank Tax is not to reduce burdenon taxpayers

The very first self contradiction in the approach of IMF lies in its own recognition of the fact that the supposed tax need not be collected and put in the form of a fund that can be used later. Correctly, it accepts that there is no need to create a fund, as instead of maintaining a fund, a government can always create a corpus by issuing more debt paper in the market. In other words, the Bank Taxes are not to be saved for financing future crisis, but will be used for different purposes as part of Government Budgets. It means that when (and if) the next crisis happens, the cost of bail outs will again be borne out by the taxpayers, with the only change from current situation being that the taxpayers can take consolation from the fact that some taxes have already been collected earlier. It also means that the next crisis will again lead to a fiscal worsening and put burden of taxpayers as it did this time. Clearly, the Bank Taxes are neither going to bring about any stabilization in the financial sector, nor will they reduce the burden on taxpayers when the next crisis happens, thereby defeating the very purpose, in its entirety, for which these taxes are proposed in the first place.

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