Professional politicos always enjoy putting down academic-types who dare to dabble in policy. Quoted in today's New York Times on the subject of health care reform, the White House Chief of Staff had these words of wisdom: “The goal isn’t to see whether I can pass this through the executive board of the Brookings Institution. I’m passing it through the United States Congress with people who represent constituents.” Even family members who advise the White House are not sheltered from this criticism: "I’m sure there are a lot of people sitting in the shade at the Aspen Institute — my brother [medical ethicist Dr. Ezekiel Emanuel] being one of them — who will tell you what the ideal plan is. Great, fascinating. You have the art of the possible measured against the ideal.”
Savvy politicians are instinctively anti-intellectual. To win elections, emotion trumps reason every time. That's why in their crafting of financial reforms, Washington types are more likely to pay attention to Yankee fans chanting "Wall Street sucks" than any in-depth report from financial regulators.
There are a lot of sound policy reasons to limit bank pay, but they are not what is driving this debate. The issue gets far more attention than it deserves from politicians and the press because it is an issue that can stir almost any crowd into a frenzy.
Similarly, there are some intellectual arguments for a stock transactions tax. But who cares? The tax has legs because politicians need money and they need to address voters' anger. British Prime Minister Gordon Brown, desperately trying to beat the overwhelming odds that he will lose next year's election, tried to tap into populist sentiment by proposing the tax at a G-20 meeting over the weekend. But there is little chance the proposal is going anywhere--mostly because everybody agrees if it is imposed, all of the largest nations must agree to it. Still, it was good public relations for the candidate.
Even though interest in a stock transactions tax will fade from view, the emotion that motivates that interest will survive. Regulators around the world are trying to figure out who will pay for the next bailout. The politically correct answer: banks should pay and not the general public. Under orders from the G-20, the IMF will issue a report on this topic in April 2010. Revenue-starved governments are sure to pay a lot of attention. The text below from the IMF web site previews what we might expect from that report:
- Financial sector tax
The G-20 officials—representing around 90 percent of the world's wealth, 80 percent of world trade, and two-thirds of the world's population—emphasized the need for quick implementation of banking industry reform, saying that stronger standards should be developed by the end of 2010, with the aim of implementation by the end of 2012 as financial conditions improve.
British Prime Minister Gordon Brown said it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a "resolution fund" as a buffer against future bailouts. Banks needed "a better economic and social contract" that reflected their responsibilities to society. Any measures must be implemented by all major financial centers, Brown noted.
Following the Pittsburgh summit, the IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.
IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G-20 to look at. "We can't go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for. The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else."
He made it clear that there was no consideration of a currency transactions tax.
He said there were two possibilities for a financial sector tax, including a "possible windfall tax for 2009, a one shot thing." The other would be a more long-term tax. Some trade off between regulation and taxation could be made: the more regulated a country, the less taxation would be needed. For example, European countries may need to tax the financial sector less because their banks were more regulated, while the less-regulated United States may want to impose a higher levy.
He said he was personally in favor of such a levy, that he referred to as “an IMF tax,” but countries could follow their own approach. “We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement."
"Think of it as a two-fold objective: (i) incentive for markets to take less risk; (ii) provide resources to an insurance fund if risk materializes."
IMF First Deputy Managing Director John Lipsky is leading the group within the IMF to prepare a report for the G-20 on the issue. “It is widely accepted that deposit insurance should be funded by a tax on the banking system,” said Lipsky last month. “This can be viewed as a mandatory insurance plan. In the wake of the current crisis, it is appropriate to consider the same issues more broadly across the financial system.” The IMF’s report would cover how potential mitigation costs could be borne and whether it was right to think about specifically charging the financial sector.