Fisher Investments Editorial Staff
Others

FAT Chance

By, 04/22/2010

  Story Outline:

  • The IMF released a bank tax proposal to the G-20 nations Tuesday.
  • The plan included a flat fee on all financial institutions—including non-banks—and a tax that would be levied on a firm's profits and employee compensation.
  • The idea that simply taxing financial institutions will somehow prevent future crises is ludicrous, not to mention taxpayers have actually made a profit on their support of banks.
  • It's all part of a global initiative to punish those perceived as responsible for the crisis and happens after every sector-led bear market. 

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The International Monetary Fund (IMF) on Tuesday released a global bank tax plan that would allegedly save taxpayers from funding future financial bailouts and make crises less impactful. (Who are we kidding here? If banks get taxed, guess who'll pay more? Customers—otherwise known as taxpayers!)

Details of the proposal include a Financial Stability Contribution (FSC)—essentially a fee all financial institutions (not just banks) would pay to resolve weak and failing firms in future crises. The FSC would initially be a flat fee for all firms, but the rate would later be adjusted based on an institution's size and riskiness (i.e., the bigger and riskier you are, the more you pay). The IMF projects such a tax would raise about $1 trillion to $2 trillion, or roughly 2-4% of global GDP, over time. How much time? They didn't say. And then there's the Financials Activities Tax (FAT), a levy on a company's profits and employee compensation. The tax would be paid to each country's Treasury, and according to IMF rhetoric, would shrink the financial sector and ensure future failures be "less likely to batter economic growth."

Where to start? Well, first off—the idea that simply taxing financial institutions will somehow prevent future crises is ludicrous. Taxing the industry (unless it's very, very heavily) likely won't reduce its size much and will little prevent significant failures from "battering economic growth," while likely "ensuring" there's less economic growth to batter. Unlike the funds collected by the US FDIC to backstop bank deposits, governments could potentially use these funds for whatever they like in the interim, meaning that if a panic does hit, government IOUs might be all that's available. Further, the need to raise money to save the taxpayer is questionable. Taxpayers have actually made a pretty nice profit on the money they invested in banks.

Should we worry? Not a chance. The IMF as an institution may appear influential—and in fact, it does hold some sway over those countries it lends to. But to the developed world at large? Not so much. Heck, the IMF is funded by the developed world. Whatever grand vision the IMF staff may have, we can expect countries to adopt regulation that best suits their individual economies. No government is about to give a supranational body even a fraction of its power to tax. And the IMF knows it—the proposal is meant to "advise countries with very different political and economic systems how they might structure a bank tax." Translation: We know you're going to do what you want anyway.

So why does this matter? Well, it's all a part of a global initiative to punish those perceived as responsible for the crisis. It happens after every sector-led bear—this time, Financials get the brunt—and it'll take a while for the sector to bounce back. That doesn't mean the financial system is doomed, just that Financials stocks may not outperform. Ultimately the blustering will fade. We'll probably get some new regulations, maybe even some that make a modicum of sense—but will all the "reform" stop the bull? FAT chance.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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