Cyprus Offers A Scary Economic Lesson For America

By James Pethokoukis

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.

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