Financial crisis: Think global, act local

Many G-20 countries including India are against a global levy on banks as they may need different approaches to deal with their institutions.

“Taxing is an easy business – Any projector can contrive new imposition, any bungler can add to the old”
    Edmund Burke
    
Taxation is considered to be the primary way by which the societies allocate burden of the government to the people. After the financial crisis of 2008, markets were seen facing a liquidity crisis and institutions going an extra mile to ensure they have enough liquidity and assets.

In the backdrop of this fragile economic recovery and the need for an active, full fledged reform of the financial sector, the thought process in respect of imposition and levy of new taxes has fuelled up in order to prevent any future fall outs.

The endeavour is to perhaps make promising changes to the tax structure and framework for institutions in conjunction with regulatory reforms ensuring policy lucidity and avoiding unfavourable effects on financial intermediation and growth.
    
In this pursuit, the international organisations and various countries are seeking to widen the tax base by proposing to levy new taxes.

The International Monetary Fund, in response to the suggestion made at the September 2009 G-20 Pittsburgh Summit to develop options for government interventions for repairing the banking system, had professed the implementation of two new taxes on banks — a Financial Stability Contribution (FSC) and a Financial Activities Tax (FAT) as a mechanism to pay for the fiscal cost of any future government support to the financial institutions.

Both the new avatars of taxes have been a subject matter of debate topping the agenda list in various international forums. In the G-20 meeting of the finance ministers in Seoul (early June, 2010),the proposal for a universal levy on financial institutions was heavily resented as many countries did not wish to impose an additional tax on their institutions and rather emphasised on passive economic pressures to recoup from the effects of recession.

Also, at the recently concluded G20 Toronto Summit (June 26-27, 2010),the debate on a single levy has seemingly remained inconclusive as it flattened the hopes of the world’s top economies in addressing the challenges in a coordinated manner recognising that there is a range of policy approaches, and that the countries need to adopt different approaches to deal with their institutions.

The G-20 Toronto Summit, in this regard has recognised that every country’s experience in crisis differs and so does their reaction and action.
    
The thought process of the conclave is also reflected in the manner in which countries have been reacting in the recent past on this divisive aspect.

Sweden has already introduced a similar levy while Germany and Britain are also contemplating the formulation of a similar measure, to recoup money so that the financial sector could make a fair and substantial contribution towards paying for any burden associated with government interventions in repairing the banking system.

The United States administration is in the process of finalising an across-the-board rewrite of regulations for the financial sector.
    
Though there may be support in Europe and the United States for some form of additional levy, the other member countries of the conclave, including India are against the concept of imposition of such additional burden as they may be against the extant principles of taxation where a common global levy is mandated considering that the right to tax is the prerogative of the sovereign.

Moreover, as the task of tax sciences is to strengthen the law, equality ought to be the rule in matters of taxation requiring the government to make no distinction and ensure no increased pressure upon one as the long range objective of all tax measures is accomplishment of good social order.

Thus, while these new levies are under contemplation, the degree of uncertainty and inequality perched around their imposition would need to be balanced in consonance with the well established principles of taxation.
    
The Indian stance on this is also based on emphasis on financial sector regulation and not rolling out the fiscal stimulus or levying additional tax on banks, although there is now a pressing need for fiscal consolidation in the developed world.

However, with there being eminent concerns over the weak global recovery as well as the Europeansovereign debt crisis,an environment foisting sharp cutbacks may impact growing economies like India.
    
The levy of such new taxes also raises myriad concerns apropos the primary premises of taxation — equity, certainty, economy and convenience. But with the advent of systemic expansion and growing economies around the globe, the basic cannons are pressed into being redefined and revisited.

It may well be assailed that the debate over these new taxes exemplifies the expression of changing cannons of taxation. But any such change, which would burden the financial institutions and ultimately reach out to the common man, would require great precaution and circumspection.
    
Thus, the evolvement of a blueprint where the broad policy objectives are set globally but individual countries are left to decide the best means by which to implement such objectives is seemingly the right move considering the burgeoning stage of the global economy post the 2008 crisis.

Whether this strategy would need to be reconsidered after the successful implementation of reforms and successful balancing of taxing rights and principles is what one would need to wait and watch out for, as no isolated levy of tax, all by itself can be a panacea to economic stability.