Why Congress Should Forbid Cyprus-Style Expropriation of Bank Accounts

Glenn Reynolds of Instapundit gazes upon developments in Cyprus, where legislators came close to taxing bank deposits to foot the bill for an IMF bailout, and suggests:

an enterprising GOP member of the House or Senate would introduce a bill immediately to make such shenanigans illegal — and dare the Dems to oppose it....

[I]t is prudent to think of places to put your money where it will be harder for the looters to get at: Paying off debt, educating your kids, hard goods that you’ll enjoy, etc. People in third-world kleptocracies tend to buy real estate in stable foreign countries, which is why so many Venezuelans now own condos in Miami. But it’s not clear that this strategy is a winner for Americans.

The real concern is that when you get productive citizens thinking this way, you’re already a step further down the road to a third-world psychology, which is not conducive to economic growth. Which is, I stress again, why enterprising GOP legislators should be pushing a non-confiscation law.

Read more here.

After Cypriot lawmakers voted down a proposal for taxing bank deposits, the situation in the European Union remains unclear.

I think Reynolds is on to something, though I'd be happy to see legislators of either party start talking up the sort of bill he proposes. For years now, there have been rumors that 401(k) and other supposedly sacrosanct retirement accounts will became game for governments low on funds. However well-based or not those fears are, anything the feds can do to draw clear lines and hem in their future behavior would be a good thing, for all the reasons Reynolds suggests. Massive levels of political and legislative uncertainty have reigned supreme in the 21st century and fear of the future is a great way to strangle it before it begins.

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  • Pro Libertate||

    With the number of people relying on 401(k) accounts, I think the government would likely trigger violence or worse if it tried to do that. Frankly, that might be more untouchable than SS. It would definitely be political suicide.

  • robc||

    Agreed. However, there is a good reason I dont own a Roth IRA.

  • Night Elf Mohawk||

    What's the good reason?

  • ||

    Just guessing, but he probably assumes at some point the government will decide to tax the money as he pulls it out. At least that's why I don't have one.

  • Night Elf Mohawk||

    Tax it how? As ordinary income?

  • robc||

    Tax it how? As ordinary income?

    Sure, why not?

  • Night Elf Mohawk||

    Because that makes them even worse than if people had invested in plain after-tax accounts. Possible? Yes. Likely enough to base an investment strategy? Not to me.

  • robc||

    Likely enough to base an investment strategy? Not to me.

    What do you see the likelihood of an asset tax against bank accounts?

    Yeah, me too, a week ago. See my point?

  • Night Elf Mohawk||

    Oh. I didn't know you lived in Cyprus. That would make a difference in my assessment, too.

  • robc||

    Cyprus didnt pass it either.

    But too many* Americans are trying to say that its a reasonable idea.

    *one would be too many.

  • ||

    I imagine it would be as ordinary income. I recognize there is an element of paranoia here, and I do vacillate about how realistic it is. But I think the point raised by rob below about low Roth penetration makes it more likely than it would otherwise be. Still not sure how likely that really is of course.

  • Night Elf Mohawk||

    A tax on Roth gains at ordinary income rates may well still be much less than if the same money had been invested in a normal after-tax way and been hit with capital gains and taxes on dividends the whole time.

  • ||

    For sure. The real problem is the uncertainty. This may well be better, or that may well be better. I'm counting on getting screwed somehow, to some degree, but I don't know how or how much. It's just frustrating.

  • Night Elf Mohawk||

    Uncertainty is why I have some money in a Roth, some money in a traditional IRA, some money in after-tax accounts, some money in stocks, some money in bonds, some money on gold, etc.

    Going all-in on one approach or the other isn't the way to address uncertainty, imo.

  • Pro Libertate||

    To be sure, if we go down the road of confiscation, we're screwed wherever we put our money. Unless we hide it somewhere, I suppose.

  • ||

    Well, diversification is definitely the answer, I just always find myself too depressed about the possibilities to start up a Roth.

  • Scarecrow Repair||

    I'd expect it to start small, like the income tax, over a certain high limit, and justified as a tax on excess interest earned, probably with some side remarks about inflation. Possibly throw in some comparison to income tax brackets being lower when the deposits were made, so now it must be taxed to make up the difference.

  • LTC(ret) John||

    WHAT SCARECROW REPAIR SAID! Its like he saw the future and reported back...

  • CatoTheElder||

    Roth income WILL eventually be taxed, but it won't be called a tax and not one in ten will understand how it is taxed.

    It's really pretty simple. Certainly you've heard about the need to means test Social Security and Medicare benefits. All Congress needs to do is to include Roth accounts in the means-testing formula and they have the revenue equivalent of a tax on Roth IRAs. A reduction in SS benefits or an increase in the Medicare premium triggered by ownership of a Roth is functionally identical to tax on the Roth.

    And, of course, it's only fair that those rich people receive less for their greater Social Security contributions and pay more for their Medicare benefits.

  • CatoTheElder||

    "Roth income" should read "Roth accounts".

  • robc||

    Yep.

    There is this untaxed growth that is a pretty target just sitting there.

    And as the Roth penetration is relatively small, there wouldnt be a huge fight over it. Im 16 years away from being eligible to take from a retirement account without penalty. I dont see it not being attacked in that time frame.

  • Citizen Nothing||

    I'm making the opposite bet. I've been converting from an IRA to a Roth over several years, in the conviction that it'll be easier to raise future income tax rates than to double-tax Roths.

  • Auric Demonocles||

    in the conviction that it'll be easier to raise future income tax rates

    That is one of the main assumptions that led me to go with a Roth.

  • ||

    in the conviction that it'll be easier to raise future income tax rates

    Like Auric, this idea sometimes pushes me further toward a Roth...

    But how high would rates have to go up for me to be taxed more then, on presumably a significantly lower income, than I am now on my marginal dollar?

    Meh. Fucking uncertainty, as Gillespie mentions.

  • Auric Demonocles||

    But how high would rates have to go up for me to be taxed more then, on presumably a significantly lower income, than I am now on my marginal dollar?

    In my case I'm currently young enough that my retirement income probably won't be that much less than what I'm making now. Though I might have to reconsider after my next raise, because I'll probably get pushed into the next tax bracket.

  • Pro Libertate||

    There's one hope that people will freak out at any changes like that applying to IRAs (or 401(k)s) regardless of whether they hold any Roth IRAs. It would be a very disturbing move, kind of in the "first, they came for the Jews" sense.

  • Night Elf Mohawk||

    You can start withdrawing from an IRA today without penalty.

    Do you think Roths will be taxed at ordinary income rates?

  • robc||

    The gains on Roths, not the principle, as its already been taxed.

    Im not even so paranoid (yet) that I think they wouldnt double tax the principle.

  • ||

    Yes, I should clarify--I also meant the gains.

  • Night Elf Mohawk||

    If they tax only the gains on Roths at ordinary rates -- how many people even know the cost basis of what was supposed to be a tax-free vehicle -- that doesn't mean Roths weren't better overall, given the tax-free growth and dividend up to the point of taxation.

  • Matrix||

    To tax the whole thing would be double taxing people. There would be revolt. They MIGHT be able to get away with taxing the capital gains, but they could never get away with taxing the contributions as well.

  • R C Dean||

    To tax the whole thing would be double taxing people.

    They do it now with dividends, why not do it again?

  • Ska||

    If a change was to be made in the tax treatment of Roth IRA distributions, I think it will start with an AGI threshold (something like if you have AGI 250K and withdraw then the previously unrealized gains are taxable).

  • R C Dean||

    Given the fiscal catastrophe that will likely strike within a shorter time frame, I think you may be unduly optimistic about the gov honoring the deal on Roths.

  • robc||

    I think you may be unduly optimistic about the gov honoring the deal on Roths.

    Im not completely convinced they will honor the deal on regular IRAs.

    However, since they will eventually get to tax every dollar, that one has a better chance.

    But that will be the argument with the Roth. With a regular IRA, you are delaying taxes and growing tax-free, but in the end, every dollar gets taxed once.

    With the Roth, all the growth is never taxed, and someone will make a "fairness" argument.

  • Auric Demonocles||

    The growth is taxed, since the principle was smaller because it got taxed at the start. However, that's a nuance that they can probably get people to miss.

    Let's assume that you get a 5% return each year for 30 years, that your tax rate is 20% for both the year you put it in and the year you take it out, and that you're going to invest $1000 pretax. Now we'll use the equation:

    Principal*ingoing tax*compound interest *outgoing tax

    Regular 401k: 1000*1.00*1.05^30*0.80

    Roth: 1000*0.80*1.05^30*1.00

    The two equations are equivalent, you get the same $3457 either way. The real difference between the two methods is if you'll have a different tax rate going in than coming out.

  • ||

    The growth is taxed, since the principle was smaller because it got taxed at the start. However, that's a nuance that they can probably get people to miss.

    Probably? Oh that's so cute.

  • Night Elf Mohawk||

    The two equations are equivalent, you get the same $3457 either way. The real difference between the two methods is if you'll have a different tax rate going in than coming out.

    Which is why, imo, you should cover both bases. So many people seem to expect that they'll have a lower marginal rate when they retire, when the tax rates might not be lower at all.

  • Night Elf Mohawk||

    Given the fiscal catastrophe that will likely strike within a shorter time frame, I think you may be unduly optimistic about the gov honoring the deal on Roths.

    Let's say that Congress does go back on the Roths and taxes gains at ordinary income rates. Is it then a given that investing in a Roth necessarily has a lower return than if the same money had been invested in an after-market account, subject to cap gains taxes and taxes on dividends the entire time?

  • robc||

    The question isnt Roth vs standard investing, it is Roth IRA vs Regular IRA.

    If you have maxed out regular ira or 401k or whatever and your roth investment is above and beyond that, yeah, no reason not to go for it, worst case scenario is a few years of tax deferred growth, which is better than nothing.

  • Night Elf Mohawk||

    The question isnt Roth vs standard investing, it is Roth IRA vs Regular IRA.

    Well, for me it was. We maxed 401(k)s while I was still working.

    Even if you don't max the 401(k)/IRA, the priority, imo, should still be something like:
    1. Put enough in 401(k) to get the max match.
    2. Max a Roth IRA (if you meet income requirements)
    3. Max 401(k)
    4. After-tax investments

  • robc||

    That seems to be "standard" advice.

    Being paranoid, I would flip #2 and #3.

  • Stormy Dragon||

    I'd move 4. up a bit on the list, just so you have something you can access penalty free in an emergency.

  • Dweebston||

    Presumably, if we're facing a truly Cyprus-like scenario, the political class has the public goodwill at its disposal to target a relatively wealthy minority with the people's blessing. I'm assuming that's why this came to a vote in the first place, anyway.

    I say we broaden the scope of this law. The Property Inviolability Act: quashing potential scams like this and asset forfeiture in one go.

  • A Secret Band of Robbers||

    The lesson we've been getting over and over for the past 10 years is that suicidal consequences don't necessarily deter politicians anymore. With TARP and Obamacare, anyone could see that they were counter to the self-interest of a significant minority of the Congressmen who voted for them, but vote they did.

    I'm beginning to wonder if politicians are learning swarm defense.

  • ThomasD||

    Yeah, they might want to think about disarming us before trying any sort of direct confiscation...

  • Dweebston||

    "Click through"? Is this from the same era of internet jargon that brought us "portals" and "hyper"links? Fogies.

  • Fist of Etiquette||

    ...and dare the Dems to oppose it....

    Does it dismay anyone else that our only real hope for codification of such protections is partisan gamesmanship?

  • Bardas Phocas||

    We did try the whole constitution thing, with restrictions on 'takings' but that's fallen by the wayside.

  • Bean Counter||

    I have been warning people for years not to incur big tax bills by transferring their traditional IRA's and 401K's to the Roth equivalent. Future legislators can simply retroactively change the rules, taxing Roth distributions or means testing them in the same way they did with Social Security. Transferring traditional retirement plans to Roth is gambling on the honesty of politicians - NEVER a good bet.

  • Jordan||

    Serious question because I trust strangers on the interwebs: I have a couple 401k's from former employers just sitting around right now. Should I do anything with them, or just leave them alone?

  • CatoTheElder||

    If you're satisfied with the fees and investment selections, why change? IANAL, but I understand that the 401(k) has more protection from lawsuits than an IRA.

    However, if you find yourself between jobs and anticipate a 15% marginal income tax rate during a tax year, partial Rothification may not be a bad idea.

  • Citizen Nothing||

    We had a really low (actually negative) income tax for a few years because of kids in college, mortgage and charitable deductions and wife staying home. So we figured it was time to strike and convert IRAs to Roths.

  • CatoTheElder||

    That's why I did it a couple of years ago. What most folks don't know is that Rothification isn't all-or-nothing. It's perfectly easy to Rothify a fraction of total IRA account to avoid going into a higher marginal tax rate.

  • Pro Libertate||

    You know, why do people stick with IANAL, with its connotations, instead of something more neutral, like IANAA?

  • CatoTheElder||

    Hmmmmm. Never thought about that.

    IANAA.

  • R C Dean||

    I Am Not An Asshole?

    Well, in my case, I kind of am.

  • Pro Libertate||

    IANAFL would work, too.

  • LTC(ret) John||

    I Am Not A Floridian?

  • Night Elf Mohawk||

    Depends on who the custodian is and how comfortable you are tracking multiple accounts.

    Personally, I'd recommend rolling them over to Vanguard, or a similar low-cost custodian, for convenience and lower expenses.

  • robc||

    I finally got around to rolling everything together last year.

    I rolled a 401k and some iras together into a single self-directed IRA.

  • R C Dean||

    I'll probably do that soon, once I'm settled into the new job.

  • Spoonman.||

    Often 401k custodians will charge fees on accounts whose owners are no longer with that employer, so if you have an investment account with Schwab or somebody like that you might as well roll it over, I'd imagine.

  • Citizen Nothing||

    Again, by not converting, you're betting that they'll double-tax Roths rather than raise the tax rate.
    (Of course, they could just do both.)

  • ||

    (Of course, they could just do both.)

    Yeah, I'm just assuming they'll do both—at least considering how far away from retirement I am. So it's a question of how much of each and how that all nets out, which is...not real easy to calculate.

  • Citizen Nothing||

    which is...not real easy to calculate.


    Illustrating, of course, the drain on the economy and investment that these inane regulations represent.

  • ||

    Precisely.

  • CatoTheElder||

    "there have been rumors that 401(k) and other supposedly sacrosanct retirement accounts will became game"

    Not just rumors. Outlines of plans to do just that given in Congressional testimony by Teresa Ghilarducci at the invitation of Congress.

    Video synopsis at
    http://www.youtube.com/watch?v=aivQdKasKpc

    Original text of "Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions" at http://www.house.gov/ed_workfo.....ducci.pdf.

  • CatoTheElder||

    Of course, the Ghilarducci plan does not steal the 401k money outright. It just confiscates the money for safekeeping until retirement.

    It is analogous to how workers' social security contributions create a compact between generations for retirement.

    Or, perhaps a better comparison is how the contributions of Cypriot depositors will be exchanged for Cypriot bank shares.

  • R C Dean||

    I think what we may see is forced conversion of (some percentage of) retirement account assets to Treasuries, sold as a way of keeping them "safe."

    Somebody's gotta clear those auctions, and I don't think the Fed can do it forever.

  • The Late P Brooks||

    That bank account- it's not really yours. Society generously allowed you to accumulate that money, and now is allowing you to hold it for them. When Society, represented by people like Maxine Waters and Elizabeth Warren, decides it can put those resources to better use than you, they'll ask for it back.

  • Jordan||

    Well, at least Elizabeth Warren will give us the fair market value in shiny beads.

  • The Late P Brooks||

    "Untaxed Cash Hoards" is a term I just heard on the teevee.

    All those evul kkkorporations are hiding their profitz overseas.

    Those un-American bastards!

  • Auric Demonocles||

    Man, you guys are starting to make me nervous about my Roth.

  • robc||

    Eh, I may be being paranoid.

    They are a great idea IF they get left alone.

    But a week ago I would have thought bank deposits would be safe from random taxation.

  • Pro Libertate||

    Just diversify, and you'll be fine. At least, assuming we don't have a horrific economic crisis during your retirement years.

  • Auric Demonocles||

    My retirement years are fair enough away that it's probably more likely that we'd have a horrific economic crisis before then.

    Now that I think about it, I'm kind of diversified anyway. My company's match goes into regular 401k regardless of whether I choose Roth or not, so I'm actually getting some in both.

  • Pro Libertate||

    In-between economic downturns aren't necessarily a problem, unless businesses you've invested in fail utterly. In fact, that can be beneficial during your working years, because you can buy up stuff cheap that should gain in value.

    Of course, this assumes that we figure out a way to avoid a major economic disaster or a prolonged downturn.

  • Auric Demonocles||

    Of course, this assumes that we figure out a way to avoid a major economic disaster or a prolonged downturn.

    I bet a stimulus would do it!

  • Pro Libertate||

    With pretend money!

  • Matrix||

    I'm getting the cement ready!

  • The Late P Brooks||

    Speaking of Roths, when I looked into converting to a Roth and saw how much of a hit I would have to take up front, I immediately abandoned any thought of it.

  • Citizen Nothing||

    You can do it in small chunks over many years, you know.

  • PRX||

    How would it be constitutional? Where's the just compensation?

  • Matrix||

    Commerce clause. Since banking is interstate, I'm sure they could weasel it in there. Or they can just call it a one-time special tax. Roberts would drool over the prospect.

  • Pro Libertate||

    Taxes aren't generally considered takings, so that wouldn't be an issue. And since Justice Roberts declared the tax power to be pretty much unlimited, well, don't be surprised if bad things happen.

  • PRX||

    don't taxes have to be tariffs, excise, on income, or a head tax to be constitutional?

  • Pro Libertate||

    You mean, like compelling you to buy health insurance taxes?

  • Auric Demonocles||

    Don't be silly Pro Lib. That's just a head tax which is totally fine, and there's that totally unrelated tax credit you can happen to get for the exact same amount by buying health insurance (which meets specifications, of course). Saying that this is some sort of health insurance mandate is crazy talk.

  • Pro Libertate||

    I still think that decision was bad for reasons that go far beyond ObamaFuckYouCare. The Court has at least occasionally found limits to Commerce Clause power. So Roberts, to avoid even more limits being declared, invented taxarama.

  • Auric Demonocles||

    Agreed. According to this logic, there is literally nothing that the government isn't allowed to force you to do simply by imposing a tax and offering a tax credit. Perhaps at some point they'll define when it becomes a "penalty" instead of a tax (though apparently what the bill itself says is irrelevant), but even that pathetic limitation doesn't currently exist.

  • ||

    Taxes aren't generally considered takings

    But not taxing is considered giving... at least by Tony.

  • R C Dean||

    Some Constitutional language:

    Article I, Section 2, Clause 3:

    Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.

    Article I, Section 8, Clause 1:

    The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

    Article I, Section 9, Clause 4:

    No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.

    And, of course, the 16th Amendment:

    The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

    I suspect sufficient authority could be "found" in there somewhere by our stalwart Justices in the event of a pending fiscal crisis.

  • Rasilio||

    That is easy.

    Tie seizure of the accounts to the creation of some new defined benefit plan.

    There is the just compensation

  • Matrix||

    Just because they pass a bill making it illegal does not mean that a future Congress can't pass another bill repealing that one while at the same time looting bank accounts.

    Also, the Dems will probably demand a sunset clause.

  • Pro Libertate||

    Probably have to amend the Constitution for it to be meaningful.

  • Rights-Minimalist Autocrat||

    Yeah, a law would only be useful for Team Red to beat up on Team Blue. If the Cyprus thing happened closer to the mid-terms, I'm sure we'd see one.

  • The Late P Brooks||

    You can do it in small chunks over many years, you know.

    Too late now. I'll just slowly slink ever deeper into the "murky underworld of cash transactions".

  • A Secret Band of Robbers||

    Why would a law like this be binding on future Congresses? Or for that matter, what reason do we have to believe that future executives won't just ignore the law?

  • The Late P Brooks||

    Where's the just compensation?

    Are you nuts? They're taking your bank account in order to bring you SOCIAL JUSTICE. What greater gift could there be?

    "Compensation" my eye.

  • Sevo||

    I have another really good reason this sort of theft should be immediately made illegal: If there's any hint it might happen, you ain't seen a bank run yet!

  • Auric Demonocles||

    Simple solution: freeze all the accounts! Isn't that what they did in Cyprus?

  • Sevo||

    Miserable as it is, there remains an opposition party. I'd say that party could force at least a day or so delay. That'll be more than sufficient.

  • Sevo||

    Matrix| 3.20.13 @ 11:00AM |#
    "Just because they pass a bill making it illegal does not mean that a future Congress can't pass another bill repealing that one while at the same time looting bank accounts."

    I'd say even a day or two of debate would do just fine to cause the collapse of every fractional bank in the country.
    By the end of day one, no bank would be open, even if they weren't bankrupt.

  • Stormy Dragon||

    an enterprising GOP member of the House or Senate would introduce a bill immediately to make such shenanigans illegal — and dare the Dems to oppose it....

    Why do we need a law to do this, implying that it would be legal again as soon as the law is repealed, when we already have the Fifth Amendment? Oh right, because it's okay to actually weaken our protections as long as TEAM RED can score political points on TEAM BLUE.

  • Pro Libertate||

    I daresay that constitutional protections aren't taken at a premium these days, and certainly a law like that could be expressly written to state that it's the opinion of Congress that such takings are illegal under the Fifth Amendment.

  • Stormy Dragon||

    The problem is that any congress with the votes to implement such a seizure would have the votes to overturn the protection law as well, so it would be entirely symbolic.

  • Jordan||

    You're seriously asking this when Congress is considering laws requiring that the Executive obtain a warrant to intercept e-mail. Yes, we're at the point now where we need laws that are effectively duplicates of Constitutional amendments in order for the government to actually respect the Constitution.

  • Matrix||

    it's not illegal if they call it a tax, and they most certainly will.

  • thom||

    Can't the law just be a clarification to the 5th Amendment?

    "Recognizing that seizure of ...from bank accounts is prohibited by the 5th Amend., it shall be unlawful for Congress to... etc, etc, etc"

  • GW||

    Wait, wait, wait...you guys have missed the boat. Why would the Uncle Sam tap retirement accounts when they can accomplish the same thing far easier, and far more politically palatable to the ignoramus American public?

    When you can just print your own money, you don't need to tap accounts. You can spend the wealth that those accounts represent without touching a dime of it. It will just become worthless.

    Cyprus and Greece would have to do something like confiscate money in their accounts because their wagon is hitched to the Euro, and they can't just print and inflate. We have that luxury, and that's exactly what we'll do. That's what EVERY country in our position has done for pretty much all of recorded history. Hell, we've done it once ALREADY. Not worth a Continental, remember?

  • Bean Counter||

    Actually, no, I don't remember. Wasn't born yet, etc.

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