Pethokoukis, Economics, Taxes and Spending

Cyprus offers a scary economic lesson for America

Image Credit: Shutterstock

Image Credit: Shutterstock

The need for cash is the mother of financial invention, as Cypriot savers and their wealthy Russian friends are finding out. While taxing guaranteed bank deposits is a new and potentially dangerous wrinkle, non-insured deposits have been confiscated in previous financial crises. Other cash-strapped nations, such as Argentina and Hungary, have nationalized private pensions.

American savers needn’t worry that Uncle Sam will order the FDIC to nick you bank deposits to help pay off Chinese lenders. But higher inflation has the same effect, while also helping government pay off its debt. If Cyprus owned the euro printing presses, they would undoubtedly be running them at high speed right about now. (The US, of course, does own its currency’s printing presses.)

And while deposit taxes aren’t on the US policy radar, other forms of wealth taxes are making their way into view. A New York Times op-ed back in November suggested one version:

American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes, which amounted to about $833 billion after refunds. Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

See, the math works! And, of course, no unintended consequences on savings and investment. By the way, don’t forget that many liberal policymakers think 401k plans a bad idea and would prefer eliminating their preferential tax treatment in favor of government-created “guaranteed retirement accounts.”

Of course, as Cyprus shows, you can see how government guarantees can sometimes turn out.

32 thoughts on “Cyprus offers a scary economic lesson for America

  1. Excellent points. To which I would add that the Fed’s low interest rate policy has been a major transfer payment from savers to the Federal Government, the land’s biggest borrower.

  2. The problem with the analysis in the NYT op-ed is that the proposal is for a direct tax, per the Constitution, a direct tax must be apportioned, and that defeats the bracketing. So, yes, we could put a tax on what Americans own (including a tax on bank deposits), but that tax would have to be apportioned or the targets of it simply could (and would) ignore it.

    • Good call. Apportionment would render a wealth tax unworkable. The 16th amendment provides and exception but only for INCOME.

      But then again, SCOTUS ruled that the Obamacare penalty was a “tax”.

      • The question whether the Obamacare mandate, as a tax, is an unconstitutional direct tax has yet to be decided by the Court. The question was not briefed at argument, and Roberts’ reliance on Hylton is very, very shaky. The Hylton court was, after all, the same court which upheld the Alien and Sedition Acts.

        • Is anyone challenging Obamacare on the basis of apportionment? At this point nobody has actually been “taxed” yet. So wouldn’t standing be an issue?

          It seems to me that a direct confiscation of bank accounts would run afoul of the 5th amendment (“just compensation”) as well. I suppose that the gov’t could enact a transaction tax on assets that could accomplish the same thing.

          Would agree with others, that those politicians who contemplate such things likely wouldn’t see the Constitution as much of an impediment.

          • In the wake of the Supreme Court’s decision, I tried to get Florida’s attorney general to revisit this question, then moved for rehearing myself when the AG failed to respond. The Clerk’s Office refused to calendar the motion because I had not been party to the original suit, and I was presented with a stong intimation that I should start over at the District level. (The Clerk sometimes can be helpful if you take the time to read carefully what he says.)

            The alternative would have been to sue the Clerk for a writ of mandamus, directling him to calendar the motion. I elected not to do that, and whether it be too late now remains an open question (the only way to learn that answer would be to file the suit).

            You are correct that the Anti-Injunction Act might apply (I am yet to be threatened with the tax), so standing is an issue; but, were standing foreclosed, there could have been no decision in the first place. The case from the Fourth Circuit raised the standing question; the Supreme Court elected to ignore it.

            As far as I know, no one yet has proceeded on this anew at the district level. (Several cases are pending on religious questions.) I’ve been waiting to save some funds.

            However, there appears to be the needed 4 votes on the Supreme Court to get the question reheard, judging by the wording in the dissent. That dissent should be read very carefully by anyone who doesn’t want to pay the “tax.”

            Before going off on your own, make sure you have researched the historical evidence re the difference between a direct and indirect tax. If you don’t know what the Read Amendment was, you’re just asking for trouble and could screw us all.

  3. When I was in the Army there was a saying, “if it moves, salute it, if it doesn’t move, paint it.” For the Left it’s, ” if it exists, tax it.”

      • Like when the Court said the Government could impose a penalizing tax on NOT buying insurance? The Court judicially knows that Americans have walked on the moon, so is this not the equivalent of taxing Americans for NOT walking on the moon? And, if so, is this not an unapportioned, direct tax?

        That precisely is the question still open in Obamacare. It’s one of first impression, so I cannot say how it will be answered; but, the Read Amendment certainly suggests that the Court should answer the question in favor of the taxpayer.

        Which leaves room for hope.

  4. Any one who thinks the government will help them should look at how well the federal government helped the native Americans.

  5. I have thought that, just as the Constitution prohibits a wealth tax, and that it took the 16th Amendment to allow an income tax, the Constitution also prohibits a Federal VAT, as that would also apply taxes in an uneven manner throughout the Union, some states paying more per capita than others.

  6. Well the FDIC deposit insurance in a day was changed from 100K to 250K, another day it can go to zero. The gov’t was fooling with a transaction tax on stocks, what else is next.

    Chrysler bondholders found that our Government can change the rules at whim, abrogating contracts. I worry about my retirement plans

  7. 401(k)s are one of the very few things that the government does that make economic sense. The present value of the future taxes is higher than the revenue that is foregone today.

  8. Oh yes, now we see the next chapter of our future. Lets call it chapter 10. But since 95% of Americans haven’t read the first 9 chapters, just another dopy euro country out of control. This is stealing property, plain and simple. Come into my house and the outcome will be different.

  9. How quaint? Still believing that the Constitution is going to protect the American people from the Democrats.

    Good one.

    Know one thing….there is NO LIMITATION on what a Leftist administration can do, none whatsoever. Anything that the Democrats decides will be proclaimed by their media wing as the greatest measure in the history of the nation.

    And when they decide that they are going to take a percentage of “the rich’s” bank balances for themselves, it will happen and opponents will be labeled “extremism” and destroyed by their media wing. A little show fuss will be made by the traitors like Graham\McCain, then they will vote for the measure and get in their limos for a big dinner to celebrate with the leftists.

    • Yes, there is a limit. Dr. Frankenstein found that out when he saw the prongs of pitchforks reflected in the light of torches.

      • Pitchforks and torches might have given pause to the fictional Dr. Frankenstein, but they didn’t make much of an impression on the Khmer Rouge. Perhaps they will deter the Obama Administration. But I doubt it.

  10. No need to worry Captain preibus has a new playbook for the repubs to save the day which is akin to the Captain of the Titantic reviewing speed,visibility, and lifeboats from the depths of the sea. Why do we keep doing the same thing over and over and expect a different result??

  11. I’ve heard on good authority that a leftist professor has already promoted to Congress a scheme whereby Congress would seize the assets in IRA accounts in return for promises. Cash money in return for politicians’ promises, yeah… no thanks.

    It’s stuff like this that makes an ordinarily rational person wonder why the feds are buying up all of the ammo. Just saying…

  12. A tax on savings will make our already anemic savings rate non-existent.

    A tax on wealth is interesting from the implementation point of view. I guess the legal and tax accounting professions are salivating over this. How will they handle for instance a wealth tax on the value of homes and their mortgages? Will they take the full value of the home and tax that? The value of the home less the remainder of the principal? If they do that will they tax the banks that hold the rest of the loans?

  13. Don’t think for a minute they aren’t finished and that goes for tax and spenders on both sides of the Atlantic.

    As Reagan said; “The more their plans fail, the more the planners plan.”

  14. When you say, “American savers needn’t worry that Uncle Sam will order the FDIC to nick you bank deposits to help pay off Chinese lenders.” Do you mean that we needn’t worry:
    1) that the FDIC will nick our bank deposits (as opposed to some other agency) and/or
    2) to pay off Chinese lenders (as opposed to funding regular government obligations)
    As Mr. Last pointed out in this week’s email from The Weekly Standard, “…when push comes to shove, you never really know what a government will do.”
    How exactly do we know that the US government won’t do exactly what the Cypriot government tried and failed to do?

    • Because it’s an unapportioned direct tax, that’s unconstitutional, and were the bank to go along, it would have its arse sued by every depositor at the bank. Pollack v. Farmers Loan & Trust (1895) was precisely such a suit. The depositor sued the bank (for theft), not the Treasury.

      • Maybe so. But your analysis assumes a) that the law is what we think it is and b) that whatever the law is, the government will obey it.
        I’m not so sure that either of these assumptions holds true these days.

        • A graduated tax on bank deposits — money already owned by the depositor as opposed to interest earned (which would be “income”) — per Pollack, is an unapportioned direct tax. Since Pollack was discussed favorably in the Obamacare opinion only one year ago, one is obliged to assume it remains good law. Yes, a terrorist could fly a plane into the Supreme Court and kill all the justices, and the Senate could roll over and play dead, allowing Obama to put Bill Ayers and Bernadine Dohrn on the Court, in which case it’s King’s X. Then again, an asteroid could strike the earth and do to us what one did to the dinosaurs, 65 million years ago. People who live their lives on such assumptions can do little more these days than hunker down in their apartments and never venture outside. But, that also leads to slow death.

          • Perhaps things will work out as you say.
            President Jackson may or may not have actually said, “John Marshall has made his decision; now let him enforce it”, but the Cherokee still went to Oklahoma.

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