Taylor Scott
The concept of bank taxes has been a contentious issue, with proposals such as a financial activities tax (FAT) and a financial transactions tax (FTT) being considered to generate revenue from financial institutions. The FAT would tax bank profits and remuneration packages, while the FTT would target a broad range of financial instruments. While some countries like Britain, France, and Germany have agreed to impose a bank tax, there is disagreement, with critics arguing that such taxes may increase systemic risk and encourage expectations of future bailouts. The US Treasury Department deposits tax revenue into a bank account with the Federal Reserve Bank, which behaves like any other bank account. This account is used to pay the government's bills and expenses.
| Characteristics | Values |
|---|---|
| Bank tax | Financial Activities Tax (FAT), Financial Transactions Tax (FTT), Financial Stability Contribution (FSC) |
| Bank tax purpose | To pay the costs of the 2008 crisis and future bailouts, and to recoup taxpayer-funded bailouts |
| Bank tax implementation | Individual countries can decide whether to implement a levy against financial institutions |
| Bank earnings | Net earnings derived by the US from Federal reserve banks are used to supplement the gold reserve or reduce bonded indebtedness |
| Bank earnings distribution | Any surplus funds from Federal reserve banks are transferred to the Secretary of the Treasury for deposit in the general fund |
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What You'll Learn
Financial Activities Tax (FAT)
Banks do pay taxes, and there are different types of taxes that can be levied on them. One such tax is the Financial Activities Tax (FAT). FAT is a tax on the sum of bank profits and bankers' remuneration packages, with the proceeds going into general government revenues. It is not a tax on the financial institution itself but is instead charged on specific transactions designated as taxable. If a financial institution never carries out a taxable transaction, no FAT will be levied. This is different from a bank tax or levy, which is a tax on the capital at risk of financial institutions, excluding federally insured deposits, and aims to discourage banks from taking unnecessary risks.
The concept of FAT was discussed in the context of the 2008 financial crisis. In April 2010, the International Monetary Fund (IMF) presented three options to deal with the crisis, one of which was a bank tax or Financial Stability Contribution (FSC). The FAT was also mentioned as a separate option from the FSC and any potential financial transaction tax (FTT). The FAT is broader in scope than a financial transaction tax, which is a levy on specific types of financial transactions for a particular purpose.
The FAT has been a subject of debate among national leaders, with some arguing that it may not effectively reduce overall risk in the financial system. There are concerns that banks may interpret the FAT as a government guarantee of future bailouts, potentially increasing risk. However, others have offered tentative support for the concept, recognizing its potential as a regulatory reform if implemented appropriately.
While the FAT specifically targets bank profits and remuneration packages, it is important to note that it does not include consumption taxes paid by consumers. The FAT is designed to generate revenue for the government rather than create an insurance fund for future financial crises, as proposed by some for the FSC. The FAT aims to balance the subsidies that banks receive from the tax system, such as their ability to delay taxes on interest received abroad.
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Financial Transactions Tax (FTT)
Banks, like all financial institutions, are subject to taxes. In the context of the 2008 financial crisis, there was a discussion about implementing a "bank tax" or "bank levy" to target banks that were taking unnecessary risks and to prevent excessive bonus payments. This led to proposals for different forms of financial transaction taxes (FTT), which have been debated and implemented in various countries.
A financial transaction tax (FTT) is a tax on a broad range of financial instruments, including stocks, bonds, currencies, and derivatives. It can be structured in different ways, such as taxing speculative high-volume, very short-term transactions or focusing on automated trades. FTT proposals often emerge as a response to specific financial crises, such as the 1994 Mexican peso crisis and the 2008 financial crisis, which sparked a global debate about using taxation to stabilize the financial sector.
The intended purpose of an FTT is to curb volatility and rescue enterprise from becoming "the bubble on a whirlpool of speculation," as Keynes first proposed in 1936. Some countries have already implemented FTTs, such as the early form of the tax implemented in 1694 as a stamp duty at the London Stock Exchange, which is still in existence today. In 1893, Japan introduced an exchange tax that lasted until 1999, with rates of 0.06% for securities and commodities and 0.03% for bonds.
While an FTT can help stabilize the financial sector, there are concerns about its potential impact on individual fund investors. Critics argue that an FTT could harm investors by raising the cost of trades, depressing fund returns, and potentially leading to double taxation. Additionally, it may create market distortions, reduce market volumes, impair liquidity, and affect price discovery.
Despite these concerns, FTTs continue to be proposed and implemented in different parts of the world, with ongoing discussions about how best to structure them to achieve their intended purposes without causing unintended consequences.
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Financial Stability Contribution (FSC)
Banks, like most corporations, are subject to taxation on their earnings. In the context of the 2008 financial crisis, there have been discussions about imposing additional taxes on banks, specifically the Financial Stability Contribution (FSC).
The FSC is a proposed tax on financial institutions' balance sheets, likely targeting their liabilities or assets. The proceeds from this tax would be used to create an insurance fund to bail out the industry in any future crisis, rather than relying on taxpayers as was done in 2008. This proposal is often referred to as a "bank tax" or "bank levy".
The International Monetary Fund (IMF) has suggested the FSC as one of two new global taxes, the other being the Financial Activities Tax (FAT). The FAT would be levied on the sum of profits and remuneration packages of financial institutions, with proceeds going into general government revenues.
The FSC has been described as a "backward-looking" tax, meaning it would be assessed on attributes determined prior to the announcement of the tax. This approach has sparked concerns about potential legal challenges, particularly in the context of the Constitution's prohibition on ex post facto laws. However, American courts have ruled that this prohibition applies only to criminal and penal law, not taxation.
While the FSC has been proposed and discussed, it has not yet been implemented in any country. Some nations, like Canada, oppose new bank taxes, arguing that institutions could simply choose to operate in jurisdictions with less stringent financial regulations unless the rules are implemented on a coordinated international basis.
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Federal Reserve Banks' earnings
Banks in the US pay taxes in the form of a bank levy, which is a tax on the capital at risk of financial institutions. The Federal Reserve System, also known as the Fed, is the central bank of the United States, and it has a unique structure and set of responsibilities. It is composed of 12 regional Federal Reserve Banks that regulate and oversee privately owned commercial banks.
The Federal Reserve System's earnings come from a variety of sources, including interest income, fees for services provided to banks and the government, and income from its portfolio of securities and loans. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the US Treasury. In 2020, earnings were approximately $88.6 billion, with remittances to the US Treasury of $86.9 billion.
The Federal Reserve Act requires the 12 Federal Reserve Banks to remit excess earnings to the US Treasury after covering operating costs, dividend payments, and maintaining a surplus. For example, in 2023, the Reserve Banks had a net income of $0.1 billion from emergency credit facilities during the COVID-19 pandemic, $0.5 billion from payment and settlement services, and $1.5 billion in statutory dividends. After accounting for operating expenses, the Reserve Banks recorded a deferred asset of $116.4 billion, representing the amount of net excess earnings needed before remitting to the Treasury.
The Federal Reserve System's balance sheet, published weekly, provides a detailed overview of its financial position, including assets, liabilities, and earnings. The Fed's duties include maintaining the stability of the financial system, supervising and regulating banks, and providing financial services to depository institutions, the US government, and foreign official institutions.
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Bank levy or resolution levy
Banks do pay taxes on their earnings, and they can also be subject to a bank levy or resolution levy. A bank levy is a legal seizure of assets in a bank account to satisfy a tax debt. This can include garnishing wages, taking money from a bank or other financial account, or seizing and selling vehicles, real estate, or other personal property. An IRS levy allows the IRS to hold funds in an account for 21 days before sending them to the IRS. Bank levies are typically a last resort for creditors when other attempts to collect payments have failed, and they can often be avoided by setting up payment plans or settlements with creditors.
In the context of the 2008 financial crisis, there was a global debate about whether and how taxation should be used to stabilize the financial sector and raise revenue to cover the costs associated with the crisis. As a result, some governments proposed imposing a bank levy or resolution levy on banks to insure them against the costs of future bailouts. This levy would be separate from a financial transactions tax, which would tax a broad range of financial instruments such as stocks, bonds, currencies, and derivatives.
The proposed bank levy or resolution levy aimed to tax the capital at risk of financial institutions, excluding federally insured deposits. The idea was to discourage banks from taking unnecessary risks and counterbalance the various ways in which banks are subsidized by the tax system, such as subtracting bad loan reserves and delaying taxes on interest received abroad. It was suggested that the levy could be imposed at a flat rate initially and then refined so that institutions with riskier portfolios would pay more.
One suggestion for the US was President Obama's proposed Financial Crisis Responsibility Fee, which aimed to raise $90 billion over 10 years from US banks with assets of more than $50 billion. The proceeds would have been used for general government revenues to pay for the costs of the 2008 financial crisis. EU leaders also instructed their finance ministers to work out the details of a banking levy by the end of October 2010. Several European OECD countries implemented bank taxes, including Austria, Belgium, France, the United Kingdom, and Greece, which had a bank levy in place since 1975.
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