Tax Increases No Different Than Taxing Bank Accounts

Would a tax on Cypriot bank accounts be that different from taxation in America? Not really.


The prospect of a tax on deposits in the banks of Cyprus has even left-leaning economic commentators in a tizzy.

"A tactical blunder," declared Lawrence Summers, who was President Clinton's Treasury Secretary and chairman of the National Economic Council for President Obama. A proposed tax of 6.75% on deposits up to about $130,000 and of 9.9% on deposits of more than $130,000 "would unfairly punish savers and could do lasting damage to confidence in banks in other euro-zone countries in financial crisis," the New York Times wrote in an editorial denouncing the idea.

Well, forgive us, but coming from the same Secretary Summers and New York Times editorialists who have championed higher taxes here in America, this strikes us as a bit rich.

What, after all, are the differences between the taxes on deposits in Cyprus that Professor Summers and the Times oppose and the higher taxes on income and capital in America that Secretary Summers and the Times support?

Perhaps it is the nationality of the taxpayers? By this distinction, higher taxes paid by Americans are good, but higher taxes paid by Russians or Cypriots are bad. Apply for a job, a place in school, or an apartment in America, and you'll get a boilerplate statement of nondiscrimination based on national origin. Yet now the left would have us believe that taxes work differently based on what country the payer is from.

Perhaps it is the fact that the Cyprus bank taxes would be deducted directly from the accounts in question? Yet plenty of taxes here in America are taken directly by the government. What's the difference, really, from having a tax payment withheld from a paycheck by the government or having it taken out of a bank account? When a person with taxes due files an electronic return with the IRS or a state government, and when the tax due is paid via electronic withdrawal from a bank account, the money is taken out of the account just as surely as is the money that would be taken out of accounts in Cyprus under the bank deposit tax plan.

Perhaps it is the retroactive nature of the tax, the fact that the people who deposited the money in banks in Cyprus did not expect that it would be subject to taxation? But American tax increases are just a variant on that. What about the person who goes through medical school and residency and fellowship only to have the federal and state government raise the rate of income tax that will be imposed on his earnings as a physician. Or what about the person who bought a piece of real estate, or a business, or a stock, only to have the government raise the rate of capital gains tax that will be owed when it was sold? I suppose one can argue that the Americans in such examples knew, or should have known, there was a possibility of tax increases, while the taxes in Cyprus were more of a surprise. But is a tax really worse because those subject to it were too foolish to anticipate its imposition, or better because those subject to it were pessimistic enough to forecast it?

Is the objection that the tax is to go to support banks rather that general government operations? The Times and Mr. Summers both supported the U.S. Treasury's program to prop up banks through capital injections and additional debt guarantees during the recent economic downturn, even though that money was raised by taxing Americans (and by borrowing from China and from future generations), by diluting bank shareholders, and by driving interest rates to low levels that in their own way punished bank depositors.

Is it the lack of representation? The proposed tax would be imposed on foreign depositors who do not have a vote on it. Yet many of the plans to raise taxes in America involve increasing taxes on a tiny minority of "the rich," who, while they have some influence because of their wealth, are so far outnumbered in a one-person, one-vote system that it raises legitimate issues about the consent of the governed.

Is it the taking? Bloomberg View columnist Caroline Baum, a sage, criticized the Cyprus proposal on the grounds that it is a confiscation that "amounts to a seizure of private property." For those of us Americans who will see the IRS or state governments withdraw funds from our own bank accounts next month for tax owed, or who are seeing payroll withdrawals and estimated tax payments this year that are higher than they have been in a decade, the distinction between "seizure of private property" in Cyprus and here at home will be, alas, an awfully fine one.

NEXT: Report: French Taxes and Regulations Have Killed One Million Jobs

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  1. Sorry, this is not a “tax”. This is a confiscation. You can argue about whether there is a distinction, I suppose, and where to draw the line, but under no defensible definition of “tax” does this qualify.

    1. What it is is an investment loss.

    2. The distinction is really not that sharp. Govt confiscates 20% or more of my income before I even get my hands on it, yet we call that a tax. I don’t see how confiscating 20% of my bank account could not be called a tax.

      1. What would the Chief Justice call it?

      2. I don’t see how confiscating 20% of my bank account could not be called a tax.

        Timing has a lot to do with it. If the government takes 20% of my income before it ever reaches my hand– with a system that I know beforehand will do so, we call that a tax.

        But once that money has been taxed, and the government gives me the nod that the rest is mine– and then upon placing those earnings in the bank, the government says, “Uhh, yeah no we’re gonna need another 9.9%”, it makes it a purely arbitrary confiscation.

        1. I still don’t see the difference, except we’re used to one of the confiscations.

          1. There is no difference. Taxation is confiscation. When taxes become voluntary donations, there will be a difference.

            1. Also, all of it is yours BEFORE government gives you the nod. The only nod they’re giving is to let you know they don’t plan on taking any more of your stuff right now.

        2. Not everyone pays taxes before the money hits their bank account. Also, by this argument, are sales taxes not taxes?

        3. “and the government gives me the nod that the rest is mine”

          Ha! That nod occurred only in your dreams.

      3. There are two big differences between a tax on income and a tax on savings.

        1. Savings you’ve accumulated have already been taxed once. Why give the government another bite?

        2. Even if your income is taxed, people still want to earn more. If your savings are taxed, people will stop saving — may as well spend and enjoy it.

    3. It’s a penalty for saving. Everyone knows that saving is bad for the economy.

      1. Robert Reich said exactly that on an NPR editorial once.

    4. It’s a levy.

      1. It’s a surcharge

  2. Is the objection that the tax is to go to support banks rather that general government operations?

    The money seized will all be “invested” in “top-tier assets” for bank capitalization purposes. IOW, sovereign bonds. This money is going to support general government operations. The banks are just laundering it for the governments.

  3. It’s neither a tax nor a confiscation, but an orderly bankruptcy.

    1. An orderly bankruptcy would pay *all* creditors X on a dollar.

      1. That isn’t how bankruptcy works. Creditors may have different payment preferences depending on the class of debt they hold.

        1. I understand that there are priorities, but within those priorities, all parties get equal treatment.

  4. Of course it looks like the Russians may have found a way to sneak their money out of Cyprus after all.

    1. Who left the *back* barn-door open?!

    2. ECB officials contacted Latvia, another EU country that has received large Russian deposits, to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said.

      So, guys with Pom-poms on their shoes are threatening Russia.

      1. That’s the thing about money — you can’t tell where it’s from.

    3. This is what passes for monetary real-politik in the New Normal – an entire nation becomes collateral when pursuing a wealthy group of people. And the “wealthy group” is victorious in the end despite everything…

      Funny that.

    4. That’s unfortunate if true. But not all bad for the pain to fall mainly in the EU, since it’s EU people responsible for the mess.

  5. The IRS claims that its system is based upon “voluntary compliance”.

    The Cypriots did not make that claim, so it’s confiscation.

  6. So, Why have I not heard of that before? Wopw.

  7. What rankles the most is two things: it targets bank accounts only, with no warning, unlike income or sales taxes where you can factor it in ahead of time. And for statists who claim to be so smart about managing other peoples’ affairs, especially the economy, it is exactly the wrong message, encouraging people to withdraw their money from banks (as has happened in at least Spain) at the very time when those same economic experts are worried about propping up and bailing out banks.

    1. For the short run, yes, it seems like we might like for people to trust banks. But over the long run, don’t we want people to also pay attention to how well capitalized and managed their banks are? Isn’t a little bit of distrust a good thing? Let the Spanish banks convince depositors that they are sound, or let them fail.

      1. Are they just seizing funds from the poorly capitalized banks? I thought it was every bank in the country.

        The lesson is – don’t go over the insured amount. At that point you can afford a cruise to the Caymans.

        1. All the banks were hit by the Greek bond default. Not sure how much diversity there is.

      2. Sure, but I was only being cynical about the Top Men doing something so obviously counterproductive. Just like that 1932 2 cents/check tax I posted a few days ago. They are so smarmy and smug and self-righteous about how smart they are, how they need to guide us peasants, and they pull bonehead maneuvers like this, and then it’s the fault of us peasants for not trusting them and doing as they say. Like two cops yelling contradictory orders to lie down and step forward, then shooting you for not obeying both.

  8. This is an old-fashioned tax on principle.

    Like in Bible times when tax collectors were thugs who came to your house and took whatever they wanted – chickens, sheep, grain, coin, maybe even a daughter.

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  10. I agree that Summer et al. are being hypocritical, but I do think there is a difference between increasing tax rates, and confiscating savings accounts. The difference being that the money in the savings accounts, most likely, has already been taxed, then saved. Now they’re attempting to retax post-tax earnings. Unless I’m missing something.

  11. First all “taxation” before serious efforts to reduce government spending SUCKS. You can quibble over the terms but anyway it’s sliced it deprives people of buying power.

    And yet no one has even mentioned that every single day in America the Federal Reserve produces money with no store of value to it, pours it into banks coffers for free, and the banks lend it to the US Goverment who dumps it into the economy – legal tender not having previous store of value dilutes the buying power of the money in our checks and savings accounts.

    But, confiscating it from Cypriots is somehow a big deal. Wake up, we’re all being hosed!

  12. D’Anconia Copper mentioned this, but it needs to be reiterated.

    There is a clear and obvious difference between the Cypress seizure and a tax, and the author of this article wrote a bad article and should feel bad.

    A tax, in almost every form, is levied on an income, or a sale, or an exchange of some kind. A gain. This seizure is from a bank account. It is literally a redistribution of wealth, and since the recipients are the banking elite, it is an (overall)upward distribution. When an income is taxed, a percentage or fee of that earning is taken, but when an asset is seized, it could be from someone who is past the point in life of acquisition. A retiree on a fixed income, or a disabled person, or an otherwise unemployable person for whatever reason, even if it’s just that there aren’t any jobs to do, has no way to recoup the asset. Since this seizure is of a static asset, this makes it a markedly different kind of theft than a tax.

    This tactic will undermine people’s belief in the security of their investments, their assets, and the overall society, calling to mind the US 1930’s collapse.

    Even as a non-capitalist, and member of what you people on this site refer to as the “left”, I feel I have enough of a basic understanding of how economics functions to excoriate the author for his inflammatory tide of BS; i.e. this article. I humbly suggest that Mr. Stoll has perhaps spent his time not so much studying Samuel Adams as drinking it.

    1. Yes, there is a difference between a wealth tax and an income tax, but I’d argue that wealth taxes are preferable.

      The relevant difference here is the immediate seizure of funds without notice. Not exactly a post facto law, but close to it. That’s the destructive part I see.

  13. “Tax Increases No Different Than Taxing Bank Accounts”

    No, because most taxes are income taxes, and not wealth taxes.

    A closer equivalence is with the Fed printing money and devaluing savings denominated in cash thereby. That has the advantage of taxing all dollars, so that there is no point in taking them out of the bank and hiding them under a mattress.

    I approve of wealth taxes over income taxes anyway. They should extend dilution to stocks.

  14. The “tax” is similar to property taxes, but nothing at all like income taxes/capital gains.

    If you bought a stock for 100, sold for 110, you may pay a tax of 20% capital gains which would be 2. If Cyprus does this it would be more like taxing them on the whole 110, making the tax 22.

    You could make a fair comparison to property taxes.

  15. So it was a “tactical” error ?
    The timing was off, but fine otherwise ?
    No surprises here (sigh).

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  17. Taxing savings accounts is the surest way for the government to earn big bucks, there can be no loopholes or deductions. But some foolish depositors might withdraw their savings and hide it under their mattresses, home invaders will then become millionaires.

  18. I have to disagree with this article somewhat. A tax is something that can be planned and arranged for. Waking up one morning to find that a new “tax” has been levied and already collected is no tax at all – it’s simple theft.

    No, what we should be asking the NYT editorial board is why they support “stimulus” packages at every turn along with loose monetary policy. This is the real tax, watering down the value of dollars already earned, and one that is borne disproportionately by working poor people. Summers calls it a “tactical blunder” because the EU didn’t use the smoke and mirrors that we use here. Too bad not a single Republican seems to be able to articulate this to anyone considered “working poor”.

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