Financial Regulatory Forum

BREAKINGVIEWS – Copying U.S. bank tax will be tempting, but hard

By Reuters Staff
January 15, 2010

By Peter Thal Larsen

LONDON, Jan 15 (Reuters Breakingviews) – Tim Geithner has changed his tune. Just two months ago, the U.S. Treasury Secretary dismissed Gordon Brown’s call for a global financial tax as “not something we would be prepared to support”. But now the United States has unveiled its plan to tax bank liabilities, Geithner is keen for others to do the same. He may be disappointed.

Other governments are bound to be tempted. The U.S. levy, designed to raise at least $90 billion over ten years, provides valuable tax revenue. It allows President Obama to demonstrate that he is being tough on banks just as they prepare to pay out large bonuses. And by penalising big banks that rely on wholesale funding, it imposes an explicit charge on those institutions that are deemed too big to fail.

But the United States is one of a very small group of countries that could impose such a tax on its own. It has a large domestic banking industry, and is home to many of the world’s major financial institutions. Only China and, perhaps Japan, are in the same category.

Other big banks, such as those based in the UK and Switzerland, are much more dependent on subsidiaries outside their home countries. A government that unilaterally taxed the global liabilities of, say, HSBC <HSBA.L> or Credit Suisse <CSGN.VX> would run the risk that those banks would simply shift their headquarters elsewhere.

So any effort to introduce a U.S.-style levy would have to be coordinated internationally. This is not as far-fetched as it may seem. Last November, the G20 group of leading nations asked the International Monetary Fund to examine the options for a global financial levy. The IMF, which has welcomed the U.S. move, is due to come up with some ideas in the spring.

Perversely, however, the U.S. decision to push ahead has made it harder for others to follow. The U.S. plan taxes the global liabilities of domestic banks, and the U.S. liabilities of foreign banks. If other countries took a similar approach, some banks would be taxed twice. Goldman Sachs would have to pay the British government for its operations in London, even though it had already been taxed in the States. Meanwhile, HSBC would face double taxation on its businesses in the United States.

A more sensible approach would be for all governments to tax only their banks’ domestic liabilities. This would reinforce the notion, popular among regulators, that national governments should in future be responsible for bailing out local banks, regardless of their ownership. First, however, the United States would have to agree not to tax its banks’ foreign operations. Given the large amounts of tax revenue at stake, that seems highly unlikely. If the Americans really want this idea to fly internationally, they are going to have to make a big U-turn.

 

CONTEXT NEWS

– The United States is encouraging other countries to introduce a tax on banks’ liabilities. The Obama administration said on Jan. 14 it would work through the G20 group of leading nations and the Financial Stability Board to encourage other financial centres to take a similar approach.

– “We are going to see if we can encourage policymakers in other important financial centres to do something similar,” Tim Geithner, the U.S. Treasury Secretary, told the Financial Times.

– The International Monetary Fund is studying options for a global financial levy, and is due to present some initial ideas at its spring meetings, due to be held in Washington, DC, in April. On Jan 14, Dominique Strauss-Kahn, the IMF’s managing director, said: “I really celebrate this proposal by the U.S. government.

– White House Fact Sheet: http://www.whitehouse.gov/sites/default/files/financial_responsibility_fee_fact_sheet.pdf

(Editing by Hugo Dixon and David Evans)

((peter.thal.larsen@thomsonreuters.com))

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