In some ways, this isn't a great plan. It punishes those who saved their money while rewarding those who consumed their income. It also means that people will have to start assuming that wealth taxes on bank account balances may happen in more jurisdictions and that they should move their money into what they deem to be safe jurisdictions. This could do harm to other countries whose banking systems have been having trouble.
This is not some sort of illegal seizure - and wouldn't even be in the United States. While we normally tax income or consumption, governments can and do tax wealth. In the United States, property taxes are quite normal. What is the difference between charging someone x% of their house value in taxes and charging someone x% of their bank account balance in taxes? It's mostly normative: we're used to taxes on physical property like houses, but not used to taxes on cash that we carry in banks. If the government decided tomorrow to switch from property taxes to bank account taxes, would you care? Mostly, it would depend on where the bulk of your wealth is. If it were in your home, you would welcome the change.
I think the reason that they chose to go after the bank balances is that a lot of it is foreign-owned. In many ways, this is much better for the Cypriot people. They may not like seeing their bank accounts go down by 6-10%, but this method spreads the burden to a lot of foreigners. If they went the route of imposing a high property tax, they would have to shoulder a much higher burden.
It's also easier to implement, in a certain light. If you impose a new tax of, say, 2% on the value of real property holdings, people are going to lose their houses when they can't come up with the money for the tax. You don't want that: it would just be chaos. Taxing the bank accounts is taxing a liquid asset. You know they have the cash to cover 10% of their bank account balance because, well, it's their bank account balance.
Since they're going to impose the levy before the banks open on tuesday (monday being a banking holiday) and banks putting a withdrawal limit of 400 Euros on customers, it looks like it can be implemented.
In many ways, it's the easiest, quickest successful tax that they could impose. And, while it will cause a lot of uproar from Cypriots, it's probably better than any other measure for them. If the government were to try and raise the money from other means (whether a real property tax, higher consumption taxes, higher income taxes, etc.), the burden would fall on residents more than this tax will. Similarly, this tax will hit the rich harder than the poor. If they raised VAT, income tax, or real property tax, the rich could move elsewhere and be spared a lot of it.
EDIT: I'm going to respond to some replies here.
First, I never said this was a good plan. I said that it would be easy and quick from an administrative standpoint. The ECB doesn't seem to want something long and drawn out or get into a situation where legislative processes and elections throw everything into chaos. Since Cyprus wants the bailout, the ECB holds a lot of the cards. We've seen how governmental changes can throw a wrench into the bailout agreements. Because this levy can be implemented "overnight", it's easy and doesn't rely on a legislature agreeing on austerity measures for many years.
This solution will be a betrayal of people's trust, it will hurt people. It will make people think twice about putting their money in banks. In fact, this is something that parts of Latin America face. However, are there alternatives for coming up with 5.8 billion Euro that would be better?
Frankly, in order to criticize well, you have to bring up other solutions against the chosen solution. This move is bad. No one thinks this is a happy move. It has cons. People will lose savings (including money they were counting on having). People will distrust banks for the foreseeable future. It will create resentment and anger. It will be bad. So, what would be better?
Now, one can argue that defaulting on the debt would be better - that's certainly a position to take. However, assuming that Cyprus doesn't want to default, how else should they have secured the ECB bailout (assuming that one needs to raise 5.8 billion Euro to do so)?
In no way was this a good plan. It doesn't net a significant amount of money in terms of EU GDP, and it enrages and frightens a lot of people.
The difference between a government switching what it taxes and this is that the former goes through intense oversight and debate by the elected officials of the country involved. People can influence the decision and it is an internal matter.
In this case, it was an external force that decided the seizure was necessary. More, it was a German-led decision. Germany imposing its will on the southern countries hasn't been well received in the past and I don't believe it will be now.
mdasen gave some very reasonable arguments that in fact, yes, in some ways it was a good plan. Fr the reasons you gave, you can certainly argue not a good plan on balance. And I would tend to agree with you, although I would confess significant ignorance to the particulars of the situation
But it is misapplication of the affect heuristic to say that because the plan stinks over all, there is nothing good about it.
He really only gave two arguments. One, that it is easier to implement, and two, that it spread the burden to foreigners.
I don't actually think this is easier to implement. Perhaps faster. In the long run, however, this is the hard way to go.
As to spreading the burden to foreigners, that's only a good thing if you're not a foreigner and you don't plan on doing business with foreigners in Cyprus.
If you are a wealthy man who has his fortune elsewhere, this is still not a good plan, because there is potential for personal repercussions.
>This could do harm to other countries whose banking systems have been having trouble.
This. Cyprus isn't the most troubled southern EU country. That honor goes to Italy or Spain. It was a bad idea for Germany to have tipped its hand this early in the game. They should have reserved this for Italy or something. You're going to see a bunch of people moving their cash out the southern EU countries ASAP.
Your conclusion that this action would be lawful in the US is an overstatement. Without contorting the Euro Zone economic rules into the US monetary system, if something like this happend in the US, it would not be a tax, but a seizure of private property without Due Process. Kinda a no-no, legally speaking.
Yes but the difference is that Cyprus lost its sovereignity regarding money creation by entering the eurozone.
The U.S. has its own way to confiscate citizen's money and that is called quantitative easing, which creates inflation. That's why they abandoned the gold standard: to be able to confiscate as much as they want using inflation.
While it's not illegal, it's hard to argue that this move is just or moral. Yes a country can levy taxes however they like, but a surprise 10% wealth tax is unprecedented. The analogy with VAT/income/property is a bit difficult because in almost any case where a government has instituted those taxes the populous would have fair warning before they went into effect. At least in America, these things weren't enacted overnight with no legislative oversight/debate, and I doubt in any other Developed nation such a thing has occurred.
That said, I can understand why they went this route. It's basically a free down payment on an emergency loan mostly provided by wealthy Russians. Again, not illegal, but it isn't exactly just to have foreigners pay for your countries debts. I don't feel terribly sorry, since most of that Russian money likely came from less than reputable means. But as the saying goes, two wrongs don't make a right.
But the repercussions will be far reaching. First off, Cyrpus can expect a run on their banks from foreigners. Don't know if they have plans on stopping that, but I don't see why any foreigner would keep money there. Secondly, Smaller countries (and possibly large ones as well) in financially precarious situations will probably start seeing a run on their banks. This can set off contagion in a region without a strong central economic force to stave it off.
Though I expect some off-shore type country to pass a law soon stating they will never perform such a tax, and a lot of money will start flowing into their banks.
In this circumstance, the first measure should be to cut losses now and dissolve the most toxic banks. Cyprus' banking system is ridiculously oversized for its economy. We need to get back to the idea of banks facilitating business, not being it.
Extracting money from people's bank accounts without even an acknowledgment is akin to foraging through their purses and wallets without consent.
Can't you see the larger issue here? This shortsighted measure will backfire.
Imagine you saved just enough money to cover rent, or see a dentist. You counted on that money being there. Wouldn't this be upsetting and a betrayal of your trust? Would you be so quick to leave money in a bank account ever again?
Edit: Actually, re-reading your comment, you went both ways and waffled like a politician. You didn't actually say anything.
It's the cost of living in a group. Your receive all the benefits of living in the group, and when the group as a whole is in trouble, you need to do your part.
If you want to be libertarian, go be a hermit in the mountains. You'll be the master of your domain there, and won't have to pay taxes or pay a penalty when other people screw up.
Which benefits? Education level going down the drain in France? Police force unable to stop rising crime? Army fighting wars in Africa and Middle East just to put dictators in place? Crazy high taxing of the private sector, so high that it's nearly killing the private sector and then taxing 21% on everything I consume? And then yet taking another 10% on what I managed to save?
The problem with "doing your part" is that once you reach a certain level of taxation you have diminishing returns: that's the Laffer curve and, sadly, socialists don't seem to be able to understand that.
And I can tell you that in many countries of the eurozone the private sector is "doing its part" since decades, only to pay for the lifestyle and entitlements of the ever growing number of public servants.
F^ck socialism. We're witnessing the failure of socialism and I can tell you that I love it. What I don't love is all the states running at deficit since decades trying to wag the dog and pretend the problem is not that states are indebted at crazy high levels.
The public sector is way too important in Europe. That's the Laffer curve and you can't do anything about it besides lowering taxation on the private sector and citizen if you want an efficient economy.
Socialists always end up with state default. There's no other way. Because socialist economies do not work. Even Sweden lowered it's public sector from 67% of the GDP to 49% in 20 years, realizing they were otherwise going into a wall.
Some countries, like Switzerland, have a constitution forbidding the state to run with a deficit too important.
This is what the eurozone should do. We should beat the socialists who are ruining our economy and destroy the entrepreneurship spirit...
You miss the larger picture too markdown. I pointed straight at it and you're still squinting.
This won't work. When the government undermines the trust of the people so that they will no longer use the financial system they are trying to protect, that's called "shooting yourself in the foot".
A bank is only in business if people trust it. Money only works if people trust it. Governments only work if the people trust it.
No, I'm not missing the larger picture. I just choose to acknowledge that the people who chose this course of action have dedicated their lives to the financial sector, are highly educated, and have access to the brightest minds in the world.
Considering that we learn about bank runs and trust in the financial system in high school economics class, I highly doubt that these people don't know about them.
In all likelihood, they chose the option that with the information they had, appeared to have the highest chance of success.
It is shortsighted: it is a temporary to prevent the sky from falling in a few days. But it's just kicking the can a bit further down the road: economically it makes no sense. You'll destroy trust and discourage people so much that you're giving a blow to the private sector so big that in a matter of years the state shall have less income than if they didn't do this.
The problem is that the state is broke. It's that or they're out of the eurozone.
This is not some sort of illegal seizure - and wouldn't even be in the United States. While we normally tax income or consumption, governments can and do tax wealth. In the United States, property taxes are quite normal. What is the difference between charging someone x% of their house value in taxes and charging someone x% of their bank account balance in taxes? It's mostly normative: we're used to taxes on physical property like houses, but not used to taxes on cash that we carry in banks. If the government decided tomorrow to switch from property taxes to bank account taxes, would you care? Mostly, it would depend on where the bulk of your wealth is. If it were in your home, you would welcome the change.
I think the reason that they chose to go after the bank balances is that a lot of it is foreign-owned. In many ways, this is much better for the Cypriot people. They may not like seeing their bank accounts go down by 6-10%, but this method spreads the burden to a lot of foreigners. If they went the route of imposing a high property tax, they would have to shoulder a much higher burden.
It's also easier to implement, in a certain light. If you impose a new tax of, say, 2% on the value of real property holdings, people are going to lose their houses when they can't come up with the money for the tax. You don't want that: it would just be chaos. Taxing the bank accounts is taxing a liquid asset. You know they have the cash to cover 10% of their bank account balance because, well, it's their bank account balance.
Since they're going to impose the levy before the banks open on tuesday (monday being a banking holiday) and banks putting a withdrawal limit of 400 Euros on customers, it looks like it can be implemented.
In many ways, it's the easiest, quickest successful tax that they could impose. And, while it will cause a lot of uproar from Cypriots, it's probably better than any other measure for them. If the government were to try and raise the money from other means (whether a real property tax, higher consumption taxes, higher income taxes, etc.), the burden would fall on residents more than this tax will. Similarly, this tax will hit the rich harder than the poor. If they raised VAT, income tax, or real property tax, the rich could move elsewhere and be spared a lot of it.
EDIT: I'm going to respond to some replies here.
First, I never said this was a good plan. I said that it would be easy and quick from an administrative standpoint. The ECB doesn't seem to want something long and drawn out or get into a situation where legislative processes and elections throw everything into chaos. Since Cyprus wants the bailout, the ECB holds a lot of the cards. We've seen how governmental changes can throw a wrench into the bailout agreements. Because this levy can be implemented "overnight", it's easy and doesn't rely on a legislature agreeing on austerity measures for many years.
This solution will be a betrayal of people's trust, it will hurt people. It will make people think twice about putting their money in banks. In fact, this is something that parts of Latin America face. However, are there alternatives for coming up with 5.8 billion Euro that would be better?
Frankly, in order to criticize well, you have to bring up other solutions against the chosen solution. This move is bad. No one thinks this is a happy move. It has cons. People will lose savings (including money they were counting on having). People will distrust banks for the foreseeable future. It will create resentment and anger. It will be bad. So, what would be better?
Now, one can argue that defaulting on the debt would be better - that's certainly a position to take. However, assuming that Cyprus doesn't want to default, how else should they have secured the ECB bailout (assuming that one needs to raise 5.8 billion Euro to do so)?