TAX NEWS - June 2010

World Business Groups Urge G-20 Leaders To Oppose Bank Tax

Several world business organizations Wednesday urged leaders of the Group of 20 nations to reject proposals for new bank taxes meant to protect taxpayers from footing the bill for future financial meltdowns.

In a letter to G-20 nations ahead of their summit later this month, the U.S. Chamber of Commerce and its cousin institutions in Japan, Canada and Australia warned new levies on financial institutions would likely throw sand in the gears of a global economy trying to pull itself out of a major recession.

"Imposing such a tax would harm companies at a time when business expansion is most needed to fuel a fragile global economic recovery," the letter reads.

The business groups--who say they represent millions of businesses employing tens of millions of workers worldwide--add weight to opposition that has come from banks and countries such as Canada, Japan and Brazil whose institutions didn't collapse in the financial crisis like those in the U.S. and Europe. Such resistance forced finance ministers in Busan, South Korea to table the issue, though many European officials are still pressing for the levy.

"Broad-based taxes on banks and financial transactions will actually dry up capital, impact liquidity and negatively affect the ability for businesses to raise capital and create jobs," said Tom Quaadman, vice president of capital markets at the Chamber.

The Chamber and the other institutions say they support the G-20's focus on coordinating policies to restore confidence in the capital markets and financial sector health. The core reform agenda for ministers now is improving capital standards and liquidity.

But the groups say new taxes would curb the liquidity needed to fuel economic growth, stagnate expansion and subsequently, government revenues. The alternative, says Quaadman, is cultivating broad-based economic growth and job creation, which would raise revenues that governments could then siphon to pay for future crises.

Government officials are adamant, however, that taxpayers shouldn't bear the burden. In the South Korea G-20 communique, finance ministers agreed that policy approaches may ultimately differ between countries. But they said "the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions ... to repair the banking system or to fund resolution."

Although the G-20 officials say any finance system reform will have to create a balanced global system to prevent arbitrage, opponents of the tax said it would still encourage migration of financial activities offshore, increasing regulatory "dead zones" and a loss of revenues.

"The financial transaction tax would damage efforts by the G-20 to increase financial regulatory cooperation and hamper coordination to address cross-border issues," the letter reads.

While European officials are pursuing a resolution fund and financial transaction tax, other countries are considering "contingency capital" that institutions would be required to set aside as a debt obligation that can be converted to equity.

As political consensus is currently focused on establishing new capital standards, many think it unlikely the G-20 will substantively address the bank tax debate, other than reviewing a new proposal being drafted by the International Monetary Fund.