1. Choose one of the three words in brackets:

While the intellectual thinking (inside, outside, within) some parts of the international financial institutions has recognised the usefulness of capital controls, there is (yet, already, however) to be formal acceptance of them within the International Monetary Fund (IMF). The IMF is reconsidering its mandate (in, over, within) the summer and autumn of 2010. While the IMF’s Articles of Agreement already contain important provisions about the rights of countries to use capital controls, consensus has not been achieved (among, between, amid) the Fund’s largest members on capital account management, (although, despite, with) its importance for both large and small developing countries.

In October 2009, the G20 asked the IMF to conduct a review of its mandate. It is unclear (when, whereas, whether) the IMF's major shareholders are willing to undertake a radical rethink of any of the Fund’s roles, or if the review will only result in some minor tweaking.

In February 2010, the IMF released a staff position note, Capital Inflows: The Role of Controls^. The paper, after examining the experience of governments (which, who, that) have regulated capital flows, notes “that the use of capital controls was associated with avoiding some of the worst growth outcomes associated with financial fragility.” The report cites Brazil’s taxes on short-term debt, and policies pursued by Chile, Colombia and Thailand, (which, who, that) require inflows of short-term debt to be accompanied by a deposit with the central bank.

2. Insert an article wherever necessary:

…… study accepts …… view – long held by ….. development economists, developing country policy makers, and NGO critics – that “….. large capital inflows may lead to ….. excessive foreign borrowing and foreign currency exposure, possibly fuelling ….. domestic credit booms (especially foreign-exchange denominated lending) and ….. asset bubbles (with significant adverse effects in ….. case of ….. sudden reversal).”

…… paper goes on to ask: “Can such concerns justify ….. imposition of ….. controls on ….. capital inflows — not only from …… individual country’s perspective, but also taking ….. account of …… multilateral considerations? …… answer is yes — under ….. certain circumstances.” However, …… IMF’s significant caveats have drawn criticism.

…… IMF staff paper cautions against “….. excessive” use of …… controls, but fails to be more specific. It also argues that …… capital controls should be “temporary”, warning that their “widespread” use may have “….. distortionary” effects and that, in …… longer term, …… controls would “lose their effectiveness.” Additionally, …… paper does not have much to say on what …… effective system of ….. controls on ….. capital inflows would look like, nor does it offer any advice on how ….. countries may design them.

3. Cross out extra words in each of the lines (if necessary):

While the renewed interest in capital controls by the IMF is a positive development, when the bias within even the more accepting staff towards the viewing capital controls as temporary, short-term solutions to deal with a volatile capital flows is still unsatisfactory. Capital flows to developing countries have been become increasingly large and volatile, with the risk of instability more acute now than yet before the Asian financial crisis, let alone when the Articles of the Agreement were written.

The IMF board needs to accept that the capital controls should be seen as a permanent and important macroeconomic policy instrument in the hands of the governments, so that they can pursue independent economic policy making, growth and financial stability. IMF staff must finally be instructed to develop mere toolkits to help developing country policy makers design controls that are best suited to their own national circumstances and own desired economic policies.

FOLLOW-UP: TRANSLATE/RENDER INTO ENGLISH

МОСКВА, 2 сен — РИА Новости. Решение, принятое в рамках встречи "большой двадцатки" осенью 2009 года, о передаче 6% квот и голосов Международного валютного фонда (МВФ) развивающимся экономикам, так и не выполняется из-за противодействия некоторых членов саммита, сообщил министр иностранных дел России Сергей Лавров на пресс-конференции в понедельник.

Совет управляющих МВФ утвердил новую систему распределения квот и голосов в этой организации еще в 2010 году, однако она до сих пор не вступила в силу, так как не прошла ратификацию в парламентах ряда стран, в первую очередь США. Конгресс США может ратифицировать квоты в МВФ осенью этого года. В результате реформы существенно увеличится доля стран БРИКС в МВФ. Ранее представители РФ говорили, что страны G20 относятся с пониманием к задержкам с этой ратификацией, считая, что это связано с обстоятельствами во внутренней политике.

"Эту задачу пока решить не удается из-за противодействия со стороны некоторых ведущих членов "двадцатки". Но для стран БРИКС этот вопрос принципиальный, так же как он и принципиальный для наших единомышленников "группы двадцати", таких как Мексика, Аргентина, Индонезия", — сказал Лавров.

"Речь идет о договорённости в рамках удвоения квот МВФ — 6% квот и голосов соответственно передать развивающимся экономикам, быстрорастущим рынкам. Это будет способствовать демократизации международной валютно-финансовой системы, и страны БРИКС едины в необходимости добиваться от двадцатки выполнения того, о чем договорились", — добавил министр.

С. DEBATE. TOBIN TAX: TO BE OR NOT TO BE?

Financial Transaction Tax: Making the financial sector pay its fair share

Brussels, 28 September 2011 – Today the Commission has presented a proposal for a financial transaction tax in the 27 Member States of the European Union. The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%. This could approximately raise €57 billion every year. The Commission has proposed that the tax should come into effect from 1st January 2014.

The Commission has decided to propose a new tax on financial transactions for two reasons.

• First, to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in the Member States. The financial sector played a role in the origins of the economic crisis. Governments and European citizens at large have borne the cost of massive taxpayer-funded bailouts to support the financial sector. Furthermore, the sector is currently under-taxed by comparison to other sectors. The proposal would generate significant additional tax revenue from the financial sector to contribute to public finances.

• Second, a coordinated framework at EU level would help to strengthen the EU single market. Today, 10 Member States have a form of a financial transaction tax in place. The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU. This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises. The financial transaction tax at EU level would strengthen the EU's position to promote common rules for the introduction of such a tax at global level, notably through the G20.

The revenues of the tax would be shared between the EU and the Member States. Part of the tax would be used as an EU own resource which would partly reduce national contributions. Member States might decide to increase the part of the revenues by taxing financial transactions at a higher rate.

Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, said: "With this proposal the European Union becomes a forerunner in the global implementation of a financial transaction tax. Our project is sound and workable. I have no doubt this tax can deliver what EU citizens expect; a fair contribution from the financial sector. I am confident that our partners in the G20 will see their interest in following this path."

Background

As a result of the crisis, public debt in all 27 EU Member States jumped from below 60% of GDP in 2007 to 80% for the years to come. The financial sector has received substantial financial support from governments. EU Member States have committed € 4.6 trillion to bail out the financial sector during the crisis. In addition, the financial sector has benefited from low taxes in recent years. The financial sector enjoys a tax advantage of approximately €18 billion per year because of VAT exemption on financial services. A new tax on the financial sector would ensure that financial institutions contribute to the cost of economic recovery and discourage risky and unproductive trading.

The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions. Citizens and businesses would not be taxed. House mortgages, bank loans, insurance contracts and other normal financial activities carried out by individuals or small businesses fall outside the scope of the proposal.

From the Financial Times (2012-2013)

The European Commission has made a pig’s ear of its proposed financial transaction tax.

But it is not too late to salvage something from the mess and reform taxation in a way that makes the financial system safer and more efficient.

The latest blow to the commission’s plans came from the European Council’s legal service. The FTT will apply to only 11 of the EU’s 28 member states. The remaining 17, including the UK, decided they did not want to introduce the tax. But the law was drafted in such a way that it still caught some transactions in countries that opted out. The lawyers condemned the FTT’s extraterritorial reach.

But this is not the FTT’s only defect. The tax was partly justified as a way of discouraging banks from engaging in risky activities. But it misses this target because the source of Europe’s financial crisis was banks not financial markets. Indeed, Europe would have a healthier financial system if, like the US, it was less “bankcentric” and more capital market-friendly. Sadly, because of a long-held prejudice, the commission came up with a levy that would gum up markets but not tax banks at all.

The commission may still find some way of rejigging its tax so it is no longer illegal. But it would be better to ditch it and look at better options for taxing the financial system. There are three: a hot money levy; a financial activities tax; and phasing out the tax bias of debt.

First, a hot money levy, otherwise known as a bank levy, would deter banks from relying too much on short-term wholesale funds by taxing their usage. Such money is typically cheaper than deposits but it also vanishes rapidly in a crisis. Indeed, reliance on easy-come-easy-go money was a big reason so many banks needed bailouts five years ago.

About half of the EU’s countries – including Britain, Germany and France – already have some type of bank levy, according to KPMG, the business services company. In the UK, for example, banks have to pay a tax based on the size of their wholesale funding. Long-term borrowing is subject to a lower rate than short-term money.

The snag is that there is a patchwork of different levies. Britain raises £2.5bn a year from its tax. That is about five times as much as France and two and a half times as much as Germany, relative to the size of their banking industries. It is not just that the rates are different; the nature of what is being taxed varies between countries.

Rather than trying to revive the FTT, the commission should try to put some order into different countries’ bank levies. Strict harmonisation would not be necessary. But agreeing common principles and bands within which the tax rate is set would create a more level playing field. It would also be good to encourage more countries to adopt such a tax. As Dan Neidle, a tax partner at Clifford Chance, the law firm, puts it: “The bank levy is a workable tax but the FTT isn’t.”

Second, the commission should look again at a financial activities tax, best known by its acronym: Fat. The financial services industry is currently exempt from value added tax. In an ideal world, it would be treated like any other industry. But for technical reasons it is tricky to apply VAT to finance.

The Fat would tax a bank’s earnings and the money it pays employees – on the theory that the sum of these is value added by another name. Taxing bank profits and bankers’ earnings would be popular. But it would only be worth doing if it had international support. Otherwise, those countries imposing such a tax would put their banks at a disadvantage to those that do not.

Finally, the commission should look at ways to remove the tax bias of debt. In most countries, companies can deduct interest payments before calculating the profit that is subject to corporation tax. But they cannot do the same for dividends. This gives companies an incentive to leverage themselves up – which then makes them and the whole economy vulnerable to shocks. The three main culprits in the most recent financial crisis were banks, property developers and private equity groups.

One solution to this problem would be to phase out the tax-deductibility of interest payments and make compensating cuts in corporation tax rates, so the taxman does not take more money from companies. Such a reform would give banks and other companies a bigger incentive to rely on equity rather than debt. Again, it would be best to make this change on an international level if possible.

These three reforms are not mutually exclusive. They would all improve the financial system, unlike the commission’s misguided FTT. The writer is editor at large at Reuters News

Letters to the editor: