Ottawa gives thumbs-down to bank tax
'You can't tax a financial sector into stability,' PM says
Canada launched a full-court press against the idea of a global bank tax Tuesday, as the prime minister and four senior cabinet members came out strongly against a proposal that's gathering global steam.
Prime Minister Stephen Harper said a proposed international bank tax would unfairly penalize well-regulated Canadian financial institutions that survived the global economic meltdown.
"You can't tax an economy into prosperity; likewise you can't tax a financial sector into stability," Harper said Tuesday.
The prime minister told a G8 and G20 youth forum on Parliament Hill that Canada's banks didn't have to be bailed out during the global financial crisis and shouldn't be saddled with the proposed levy.
"They were not able to exploit some of the opportunities that got so many of these other Western banks into trouble. That's why we think it would obviously be unfair," Harper said Monday.
Rather than a more formal tax on bank earnings, Canada has championed a plan it calls "embedded contingent capital" as a way of strengthening the financial system and mitigating the need for bank bailouts.
Essentially, the system would allow banks to sell bonds to pad their reserves, but the bonds would automatically be converted to equity during bad times, thus avoiding the need for a taxpayer bailout.
The system theoretically would encourage bondholders to keep a closer eye on management because they would be unwillingly converted into shareholders if anything goes wrong.
Toronto-Dominion Bank chief economist Don Drummond told CBC News he expects the bank tax proposal will fail because it isn't logical.
"We want banks in the United States and Europe in particular to hold more capital," he said. "So why would you want to tax them and take away the money that they could otherwise be putting towards capital?
"Instead of raising some bank tax, you should have a higher capital requirement than has prevailed in those countries," he said.
Drummond also said that the creation of an emergency bailout fund might have the unintended consequence of encouraging banks to take more risks, knowing they have the fallback of government help.
Canada will host extraordinary back-to-back meetings of the G8 and G20 next month in Huntsville, Ont., and Toronto. Harper said he will use his position as host to push the G20 to adopt a more sustainable system of financial regulation as a corrective to the economic meltdown.
The bank tax was being pushed by European countries and had the backing of the Obama administration. Harper's latest comments mark the start of a renewed push by his government to derail the idea, which is also being opposed by some of the developing economies of the G20.
Five Conservative cabinet ministers echoed Harper's comments in four major cities on Tuesday that will essentially trash the tax, while calling for stronger regulations for financial markets.
"Let us be clear — our government is opposed to a global bank tax," Foreign Affairs Minister Lawrence Cannon told reporters in French. He was flanked by Industry Minister Tony Clement at an event in Ottawa, reinforcing the idea of a united front.
"Such a tax would reach into consumers' pockets and punish our financial institutions, which have taken precautions," Clement added.
"Our banks avoided toxic assets at every turn," Cannon said.
Finance Minister Jim Flaherty spoke to reporters in Mumbai, India, on Tuesday, reiterating his opposition to a bank tax, but urging collaboration in finding a solution.
"This debate has been a source of distraction from the main issue," Flaherty said.
G20 finance ministers made clear in their communiqué from Washington in April that the main issue is the quality and quantity of capital, and a cap on leverage, Flaherty said.
"So all this talk about a bank tax … we need to focus on [the main issue] again and get it right."
He also said reports that Canada was standing alone in its opposition to the idea are not true, as several other nations also have reservations about the bank tax plan.
"The idea will not obtain the universal support that perhaps some thought it would obtain," Flaherty said.
He also said he doubted that the upcoming G20 summit would bring resolution to the debate or see any radical new ideas, as leaders have circled the end of 2010 to formally resolve the issue. "I do not anticipate new proposals, but I do expect more detail on existing ones," he said.
Treasury Board President Stockwell Day went even further, stressing Canada's opposition to any hard tax on financial transactions.
"We're very much opposed to the suggestion that banks should be taxed," he told reporters in Shanghai.
"We're worried that banks who had their act together be taxed, because the Canadian banking system did not have to be bailed out."
With files from The Canadian Press