By Cho Jin-seo
Staff reporter
The International Monetary Fund (IMF) will keep pushing the G-20 nations into a renewed debate on bank levies though it is unlikely to be a top priority during this weekend’s summit in Toronto.
A senior IMF researcher reiterated the agency’s position in defending the bank levy during his stay in Seoul this week. The IMF is likely to give a wide range of policy options to member nations, as the G-20 have already abandoned the idea of a universal, one-fits-all bank tax regime.
Michael Keen, assistant director of the fiscal affairs department at the IMF, said Monday that the bank tax should become an integral part of the modern economy, in the same way corporate tax is taken for granted in almost all nations in the world now.
“I like to compare this to the corporate tax rate. We don’t know what the optimal rate is, and there is a huge variation from country to country, from as much as 44 percent to 10 percent. But this does not mean that we have to keep corporate tax rates at zero,” he said during a conference in Seoul, Monday.
Keen was speaking at the conference hosted by the Korea International Finance Association at the Bankers’ Club in central Seoul. Though he said he is not allowed to talk to the media and his views should not be attributed to the IMF, the hosts of the meeting said that Keen’s report will be distributed to the G-20 nations ahead of the Toronto summit this weekend, on which they will discuss ways to build a consensus.
The G-20 has abandoned the idea of a universal bank tax during the finance ministers’ meeting held in Busan earlier this month. Countries such as Canada and Australia openly opposed the plan, insisting that it will only punish their banks unnecessarily, and the distortion caused by the new tax will be put on the shoulders of the ordinary customers of banks, not the banks themselves.
Keen attacked such views, that it is precisely what the bank tax is intending to do.
“It is a distortion in good ways, a distortion to change the behavior in good ways,” he said, adding it is natural that people who put money into banks need to share the responsibility.
Some Korean economists at the conference echoed this view. Kim Jabonn research fellow at Korea Institute of Finance, said that the bank tax is a type of “Pigovian tax.” A Pigovian tax is a tax which is intended to correct the market outcome by making it reflect the social costs, such as the pollution tax and the“sin tax”on alcohol and cigarettes. Using this argument, Kim said Canada and other opposing nations will need to think again about a bank tax and should change their opinions.
“Canada’s position is not absolute,” Kim said, citing various data he collected regarding the country’s exposure to financial risk during the crisis. “I think there is a political reason that they are raising such a strong objection (to bank tax).”
The South Korean government wants to lead the G-20 nations to make an agreement on the bank tax issue by November’s summit, which is to take place in its capital city, Seoul. But since Canada is hosting this week’s summit, it is unlikely for them to reach a breakthrough soon, Korean officials say. According to finance minister Yoon Jeung-hyun, there were moments of tense argument among the G-20 nations in that it almost turned into a physical scuffle.
In Toronto, the IMF is proposing two key elements of the bank tax _ the Financial Stability Contribution, which is linked to the banks’ operational risks, and the Financial Activities Tax, which is levied on profits and remuneration of employees.
Another issue to be discussed is how to use the money raised from the bank tax. The United States and most countries who are considering the bank tax want to create a specific fund with the sole goal of bailing out financial firms in times of emergency.
But some worry that this fund will make banks feel complacent and create a moral hazard among them, so they insist that the revenue raised from the bank tax should be treated as general tax revenue. Korea is yet to take a position on this issue, an official with knowledge of this issue said.