International Monetary Fund Backs Tobin Tax

IMF presses for tax on banks' risky behaviour

Fund chief Dominique Strauss-Kahn says financial institutions should bear cost of insuring against world economic crises

October 2, 2009

guardian.co.uk - IMF head Dominique Strauss-Kahn at the Istanbul Congress Centre Dominique Strauss-Kahn ruled out a 'Tobin-style' tax on currency transactions but the IMF will research other options.

The International Monetary Fund today threw its weight behind a new tax on the global financial sector designed to limit risky speculative behaviour and help the world's poorest countries.

Dominique Strauss-Kahn, the IMF's managing director, said banks and other big financial institutions were responsible for systemic risk and it was only right that they provided resources to mitigate those threats to the world economy.

While ruling out a so-called Tobin tax – a levy on foreign currency transactions proposed by the American economist James Tobin in the early 1970s – Strauss-Kahn said a high-level IMF team would work on proposals in the coming months.

"The very simple idea of putting a tax on transactions won't work for many technical reasons," Strauss-Kahn said at a press conference held in the run-up to the IMF's annual meeting in Istanbul next week.

"On the other hand, considering the financial sector is creating a lot of systemic risks for the global economy, it is fair that the sector pay some part of its resources to mitigate risks it is creating itself."

Strauss-Kahn said a team led by the IMF's number two, John Lipsky, would be looking at the merits of setting up a fund that would provide some form of insurance against future financial crises, as well as help for low-income countries.

The fund was asked to investigate "Tobin-style" taxes by last week's G20 summit in Pittsburgh following pressure from the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy.

Merkel believes a levy on global finance should be used to help poor countries adapt to climate change, while Sarkozy said that the IMF should draw up proposals for a "tax on speculative or risky financial activities".

Lipsky said that he accepted the idea of a form of deposit insurance paid for by the financial sector:

"How should the potential damaging costs to the global economy [from risky behaviour] be borne? It is right to think about them being borne by the financial sector more broadly. The G20 has asked us to look at this question and it is a very valid question."

Britain and the US, both of which have strong financial sectors, have always been lukewarm about transaction taxes, arguing that they are impractical and will drive business offshore. But any suspicion that the IMF would kick the idea into the long grass under pressure from Washington and London was removed by the comments of Strauss-Kahn and Lipsky yesterday.

Tobin's original suggestion was a small levy of perhaps 0.1% on currency transactions, which would deter speculators targeting a country's economy for short-term gains.

This idea returned to public prominence at the end of August when Lord Turner, head of the UK's Financial Services Authority, said that the swollen and "socially useless" banking sector should be taxed back down to size.

Turner told Prospect magazine:

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits."

Charities including Oxfam and War on Want welcomed Turner's comments.

The IMF said later that the study would be undertaken by its fiscal affairs department, which would report back to the G20 by next June.

The UK Treasury said today that there were a number of problems with the sort of mandatory insurance plan being considered by the fund's economists.

Any initiative designed by the IMF would have to apply globally to stop banks playing countries off against each other.

Max Lawson, senior policy adviser to Oxfam, said:

"This could be a hugely popular tax, making the banks pay for the mess they made. Bankers will fight this tooth and nail but they must be resisted by G20 leaders."