TAX NEWS - June 2010

Franco-German alliance on bank tax

You didn't really think it was over, did you?

According to Agence France Presse, German Chancellor Angela Merkel and French President Nicolas Sarkozy say they will back each other in a call for a global bank levy and a tax on financial market transactions at the Group of 20 summit next weekend.

"We have agreed that we will write a joint letter to the current president of the G20, Stephen Harper...making clear our expectations for a successful G20," Ms. Merkel said in Berlin, according to the AFP report.

Brief recap: Earlier this month, the G20 finance ministers effectively agreed to set the bank tax issue aside, accepting that a levy is but one way to keep the group's promise to ensure taxpayers are never again called on to save a bank. But that was by no means an agreement to keep quiet about it. Au contraire. The European advocates of a tax now have a greater incentive to lobby for their cause because the more countries they convince to join, the less risk they face of losing financial institutions to non-tax jurisdictions.

"We aren't satisfied yet with what has been accomplished since the first G20 meeting, and we agree that regulations must be enacted more swiftly," Ms. Merkel said, according to a report by Dow Jones.

So the debate goes on. What is more significant for the Toronto summit is the forging of a stronger Franco-German alliance ahead of the talks. This started taking shape last week with word that France would back Germany's ban of naked short selling, an important diplomatic gain that ended Ms. Merkel's isolation on the issue.

"More than before, Germany and France are determined to speak with one voice," Mr. Sarkozy said, according to Dow Jones.

Finance Minister Jim Flaherty's spokesman, Chisholm Pothier, declined a direct comment, saying Canada's position on the bank tax is clear. Indeed.

Still, an alliance of continental Europe's two biggest economies will test Canada's sway with other members of the G20. So far, Mr. Flaherty's argument that a tax is an unfair punishment of countries that stayed out of trouble has been enough to muster a posse that includes countries such as Australia, Japan and Russia. But French and German support for a financial transactions tax changes the debate a little. In theory, it could be applied to the kinds of risky trades that the G20 is committed to stopping. In reality, it might not work, but would certainly raise considerable revenue. At a time when deficits are bulging and environmental and aid programs are going unfunded, a financial transactions tax could entice some governments -- especially if a couple of the world's biggest economies are doing it.