Wednesday, April 21, 2010

IMF calls for tax on financial institutions

The International Monetary Fund (IMF) has recommend that financial institutions pay taxes that would be placed into a fund in order to bail them out in the event of crisis. The UK Chancellor (Financce Minister), Alastair Darling, has welcomed the proposals.

It doesn't appear to be a Tobin Tax - a tax on international monetary transactions - although this form of taxation has been gathering some momentum including some support in the City.

This blog has also discussed the Tobin Tax before, with the idea that it might be a useful way for the IMF to raise funds to bail out financial institutions during crises. This would be different from the view of organisations like Attac (Association pour une Taxe Tobin pour l'Aide aux Citoyens) in that the funds raised would not be used for development purposes but rather for financial stability.

I would also prefer such a use - partly since greater financial stability would, in itself, help development, as well as the impact of crises in developed countries. I would be cautious about any moral hazard issues though - will financial institutions behaviour become more risky if they feel they are more likely to be bailed out? But at the moment, Governments already baoil out their financial institutions, so this may not have any impact.

In addition a with a few additional rules, moral hasard risks could be minimised - for example if proven wrong-doing/rule-breaking were met with genuine risk of prison and large-scale stripping of personal assets through large fines for individuals - even as their organisation is rescued.

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