IMF Draft on FTT

4/16/2010STRICTLY CONFIDENTIAL

Meeting of G-20 MinistersApril 2010

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INTERIM REPORT FOR THE G-20Prepared by the Staff of the International Monetary Fund

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Executive Summary ...................................................................................................................2

I. Introduction ............................................................................................................................4

II. The Recent Crisis: Public Support Provided and Measures to Recover It ............................5

A. Public Support Provided ...........................................................................................5

B. Measures Adopted or Considered .............................................................................6

C. Analysis .....................................................................................................................6

III. Measures to Limit and Help Meet the Costs Of Future Crises ............................................7

A. Objectives and Measures ..........................................................................................7

B. Financial Stability Levy ..........................................................................................10

C. Possible Additional Tax Instruments ......................................................................14

IV. A Way Forward .................................................................................................................21

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1. Background materials ............................................................................................................4

2: How would an improved resolution scheme work?...............................................................8

3. A levy on financial institutions: What is the appropriate base?...........................................12

4. Should there be a fund? ........................................................................................................13

5. A corrective role for an FTT? ..............................................................................................17

6. The nature, incidence and implementation of a Financial Activities Tax ...........................20

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Table 1. Current proposals for forward-looking financial sector contributions ......................23

Table 2. Summary of proposal .................................................................................................25

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1. Fiscal Costs of the Recent Crisis .........................................................................................26

2. Contribution-related Measures Adopted or Proposed..........................................................32A. The U.S. Financial Crisis Responsibility Fee .........................................................32

B. Bank Levy in Germany ...........................................................................................33

C. The U.K. Bank Payroll Tax .....................................................................................34

D. The Bonus Tax in France ........................................................................................34

E. The U.S. Systemic Dissolution Fund ......................................................................35

F. The Swedish Financial Stability Fund .....................................................................37

3. Corrective Taxation and Prudential Policy ..........................................................................39

4. Current Taxation of the Financial Sector .............................................................................48A. Overview .................................................................................................................48

B. Issues .......................................................................................................................49

References ................................................................................................................................53

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This is an interim response to the request of the G-20 leaders

for the IMF to: “...

prepare areport for our next meeting [June 2010] with regard to the range of options countries haveadopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions torepair the banking system

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While the net fiscal cost of government interventions in support of the financial systemmay prove relatively modest, this greatly understates the fiscal exposures during thecrisis

. Net of amounts recovered so far, the fiscal cost of direct support has averaged2.7 percent of GDP for advanced G-20 countries. In those most affected, however,unrecovered costs are on the order of 4–5 percent of GDP. Amounts pledged, includingguarantees and other contingent liabilities, averaged 25 percent of GDP during the crisis.Furthermore, reflecting to a large extent the effect of the crisis, government debt in advancedG-20 countries is projected to rise by almost 40 percentage points of GDP during 2008–2015.

Many proposals have been put forward to recover the cost of direct fiscal support— some of which have been implemented

. Proposals for the government to recover these costsinclude levies related to selected financial sector claims and taxes on bonuses and specificfinancial transactions. The least distortionary way to recover the fiscal costs of direct supportwould be by a ‘backward-looking’ charge, such as one based on historical balance sheetvariables. This would define a fixed monetary amount that each institution would owe, to be paid over some specified period and subject to rules limiting the impact on net earnings.

The focus of countries’ attention is now shifting to measures to reduce and address thefiscal costs of future financial failures, both through regulatory changes and throughimposing levies and taxes on financial institutions

. Measures related to levies and taxesshould: ensure that the financial sector meets the direct fiscal cost of any future support;make failures less likely and less damaging, most importantly by facilitating an effectiveresolution scheme; address any existing tax distortions at odds with financial stabilityconcerns; be easy to implement, including in the degree of international coordinationrequired; and, to the extent desired, require an additional fiscal contribution from thefinancial sector in recognition of the fact that the costs to countries of crises exceed the fiscalcost of direct support. A package of measures may be needed to attain these objectives.

Measures that impose new costs on financial institutions will need to reflect and becoordinated with regulatory changes under consideration.

This is critical for ensuring policy coherence, enabling market participants to plan accordingly, and avoiding adverseeffects on economic growth from placing an excessive burden on the financial sector.

After analyzing various options, this interim report proposes two forms of contributionfrom the financial sector, serving distinct purposes

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