economics

April 21, 2010

The IMF’s FAT Tax: The Name Says It All

The International Monetary Fund, where the United States has 16.74% voting power, is proposing (pdf) two new global taxes — a “Financial Stability Contribution,” or FSC, and a “Financial Activities Tax,” or “FAT.” This is in preparation for a G-20 summit in June. (Link via USA Today.)

The FSC is proposed as a “‘backward-looking’ tax, meaning one assessed on some attribute—with balance sheet variables a logical choice—that was determined prior to the announcement of the tax.” It sure looks to run counter to the spirit of the Constitution’s prohibition on ex post facto law, though, alas, the American courts have ruled the prohibition applies only to criminal and penal law, not to tax. The IMF acknowledges as much, writing, “Care would be needed in selecting the base so as to avoid legal challenge as retrospective taxation.” The care seems to be needed so as to avoid the legal challenge rather than to avoid doing violence to the actual underlying concept of rule of law.

The FAT, on the other hand, is described as “levied on the sum of profits and remuneration of financial institutions.” One possibility is to tax only “profits only above some threshold rate of return,” so that “the FAT would become a tax on ‘excess’ returns in the financial sector.” The Obama administration took this approach with the health insurance companies in some of the ObamaCare legislation — who knew that the idea would move so swiftly to the rest of the economy, where profits above a certain government-approved level are suddenly to be deemed “excess”?

“A FAT would tend to reduce the size of the financial sector,” the IMF says, as if this were a virtue of the proposal. The IMF also notes that “Israel applies such a tax,” without noting that the Israeli banking sector is famously rigid, non-competitive, oligopolistic, and prone to poor customer service.

The BBC’s business editor, Robert Preston, writes that the proposals “are more radical than I anticipated” and “are likely to horrify banks, especially the proposed tax on pay.”

We’ve been warning of the trend toward international taxation, diminishing American sovereignty, for some time. And we’ve also been warning that the “fat cat” language would lead to no good. Who was the political mind at the IMF who came up the idea of marketing a tax on financial industry profit and pay as a “FAT”?

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