TAX NEWS - JUNE 2010

Canada Tax: Canada should join global bank tax club

Prime Minister Stephen Harper should not spend his time, and political capital, trying to fend off a global bank tax. It's a levy whose time has come and is supported by the IMF, the United States and the European Union.

It is a sound, and appropriate, multilateral response to banking malpractice. It would go toward the cost of oversight plus a gigantic bailout fund, both of which would aim to avoid the bad practices that ruined the world economy in 2008 at a cost of trillions in tax dollars and millions of jobs.

Canada's arguments against the bank tax are:

-Canada's banks should not be forced to pay a levy when they didn't do anything wrong.

-A levy such as this one would create a moral hazard, and encourage bad banking by removing negative consequences.

My reaction to these arguments, which are the bankers' arguments backed by the Tories, is that the elegant way to co-operate internationally while sheltering the Canadian banks is to agree to the global tax and lower bank taxes at home in compensation.

Corporate and bank taxes in Canada, by the way, should have been lowered before anyway.

The issue here is that multilateral management and readiness are the only hope that another meltdown won't occur again. Banks have behaved badly most everywhere and some will do so again if they operate in countries that don't know what they are doing.

That's why Ottawa's underlying argument -- that bank regulation or taxation is a matter of strict sovereignty -- represents a bigger moral hazard than bailouts do.

Without a global bank tax, and multilateral tough rules, a new generation of players can plug into the global financial economy, behave recklessly, cause harm to millions and suffer no negative consequences whatsoever because they are bust or are hiding behind a border.

A global bank tax will not only help defray costs, but more importantly will greatly leverage peer-group pressure on the part of good banks paying taxes toward bad banks that are about to go bust and result in a higher global bank tax.

And frankly, banks that decline to pay such a global bank tax should be boycotted.

It is imperative for a country such as Canada to fully encourage the creation of a global governance system and pre-emptive nest egg to help defray regulatory costs as well as future damages.

Without global oversight and "skin in the game" in the form of a global tax, the global financial economy will again be revert to being run like Dodge City without a sheriff.

By the way, what the IMF has suggested with this tax is no different than what is required in the mining industry in most provinces. Companies must submit credible remediation plans to restore the environment after their mines have finished operating. Then they must sequester the funds to do the job even when that future cost will amount to tens or hundreds of millions of dollars so that taxpayers aren't left holding the bag when a company's disappeared or gone bust.

If that's good enough for resource companies, why shouldn't all the world's banks have to do the same?