Monday, February 15, 2010

New report: how to tax banks

(Update: the FT adviser has covered our report in detail.)

Bankers are very successful at avoiding taxes. They operate from secrecy jurisdictions where they can book a large part of their profits. Their services are exempt from value added and other forms of sales taxes. Their trades in currencies, derivatives, gilts, swaps and other over-the-counter transactions are largely untaxed. They claim tax relief on the massive bonuses they pay themselves from profits.

There are no sound economic reasons why they should receive these implicit subsidies on their largely rent-seeking activities. This is more about power politics than economics. Bankers are extraordinarily adroit, not to say brazen, at holding governments to ransom. Yet when their houses-of-cards come crashing down around their heads, bankers are happy to call on taxpayers to dig them out of the wreckage.

Clearly something needs to be done to make bankers pay their way in the communities where they operate. At the same time, financial markets need to be shaped in ways that will protect us - and the bankers- from their "irrational exuberance" (Alan Greenspan's famous phrase being a polite way of talking about a toxic combination of greed and foolishness).

The International Monetary Fund has invited submissions from civil society and others on how banks might be taxed in future. These submissions form part of a consultative exercise in advance of the IMF issuing a report to the G-20 Summit meeting in Canada later this year on how bankers can contribute towards the cost of the chaos they have caused.

In cooperation with our colleagues at Christian Aid, the Task Force on Financial Integrity and Economic Development, Tax Research UK (lead authors of the report) and the Trade Union Congress of the UK, we have submitted a report which recommends significant reform of taxation of banks, not simply as a means of raising additional revenue, but also to shape the activities of banks in ways that will make them less harmful and more tax compliant.

Our core recommendations include:

1. A tax on foreign currency exchanges.

2. A tax on derivative trades.

3. A tax on share transactions.

4. An accounting standard to require banks to report their profits and losses, tax paid and limited balance sheet information for each jurisdictions where they operate.

5. Global adoption of a General Anti-Avoidance Principle to strengthen the position of tax authorities wanting to challenge sophisticated tax avoidance structures used by banks to shift profits to low or zero tax jurisdictions.

6. Binding Codes of Conduct for banks requiring them to adopt tax compliant policies.

7. Limitations on the time period that banks can carry forward their losses incurred during financial crises for offset against future profits.

8. Limitation on the amount of bonus distribution that can be offset against profits for the purposes of reducing the bank's tax liability.

We don't claim these recommendations will wholly solve the problem of bad bankers, but they will go some way towards remedying the appalling culture of greed and anti-social behaviour that has engulfed the banking industry.

You can read our report and recommendations here. Read Richard Murphy's additional points on the incidence of taxing bankers here.

1 Comments:

Blogger Physiocrat said...

1. A tax on foreign currency exchanges.

Why should people be punished by shopping at ICA or Lidl instead of Sainsburys? People should be free to trade unimpaired. That is a basic human right. A tax on foreign currency exchanges is an infringement of that fundamental human right. What exactly is the problem with trading in foreign currencies? If governments run bad economic policies and people reduce their holdings in those countries currencies, who is to blame? If you knew you were going to need, say, South African Rands for a trip to see your great-aunt in Cape Town, you would defer your purchase for as long as possible if the Rand looked dodgy, and buy as soon as possible if the £ looked dodgy, which it does.

2. A tax on derivative trades.

Derivatives began as a way of spreading risks eg if you were making crisps and wanted a firm price for the potatoes you were going to use in six months time. The business has turned, in part, into a casino exercise. The trouble with a blanket tax is that it fails to distinguish between legitimate risk-spreading and gambling. But certainly in a period of volatile exchange rates, it is reasonable to take steps to avoid the risks arising from fluctuations, which is one of the purposes of derivatives.

3. A tax on share transactions.
We have one. Stamp duty. There may be a VAT liability too. The real trouble is that the whole business of share trading is unproductively parasitic and largely underpinned by gambling on the land values that form a major element of share value.

4. An accounting standard to require banks to report their profits and losses, tax paid and limited balance sheet information for each jurisdictions where they operate.

Almost all accounting is bad in that it fails to separately identify imputed rental income and lumps it all under the heading of "profit". This is ultimately bad for the business themselves.

5. Global adoption of a General Anti-Avoidance Principle to strengthen the position of tax authorities wanting to challenge sophisticated tax avoidance structures used by banks to shift profits to low or zero tax jurisdictions.

Nice idea but when the government is unwilling even to regard "constructive demolition" (to avoid the UBR) as tax avoidance, one wonders if anyone is really serious.

6. Binding Codes of Conduct for banks requiring them to adopt tax compliant policies.

Sorting out the mess that is the tax system would make the task much easier.

7. Limitations on the time period that banks can carry forward their losses incurred during financial crises for offset against future profits.

Banks should not be making losses, it is due to bad banking practice. But this problem is a consequence of the tax system.

8. Limitation on the amount of bonus distribution that can be offset against profits for the purposes of reducing the bank's tax liability.

Banks would not be making huge profits if they conducted their business as bankers ought, instead of which they are mixed up in the land values game, which is how the huge profits and losses arise.

One correct fiscal measure would resolve much of this at a stroke.

3:36 pm  

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