10% tax on ALL capital proposed by the IMF

By Filipe R. Costa

Six months after the European Union and IMF raided Cypriot bank deposits, global central planners now have their eyes on fixed on the rest of Europe’s savings.

March’s “Cypriot Experiment” shocked asset owners around the world for three main reasons. First a tax on bank saving represented a second tax. After all, this was saved income, on which tax should already have been paid. Second, it was viewed as unfair because ALL deposit holders in Cyprus were liable, not just Cypriot nationals. Third it set a dangerous precedent. Regardless of the future consequences, Merkel and Lagarde led the crusade to force the deposit tax through, in order to raise $7billion to bail out Cyprus’ stricken banks.

Flush with this policy success, a group of IMF economists have revisited what happened in Cyprus and have proposed a novel way of solving Europe’s growing public debt-to-GDP problem. Their genius idea is to levy a one off capital tax of 10% on all of Europe’s assets!

The IMF’s proposal is to levy this tax on all eurozone households with a positive net wealth (although, admittedly, this list diminishes by the day). Citing other notable economists, such as Schumpeter and Keynes, the IMF claims there is a growing level of support for this idea. Forget for the moment the fact that Schumpter and Keynes lived in markedly different times to our own, what these people should perhaps think a little more about is how this would play with European voters. It also would be a good idea to consider where these brilliant IMF economists have all their money. Swiss bank accounts, by any chance?

The IMF geniuses are correct in pointing out that current government spending isn’t sustainable. With GDP growing less than fiscal spending, many European governments are running structural deficits. At some point, these governments are going to find it impossible to borrow more to cover expenditure. The numbers are clear in this regard. The following table projects government debt levels, as a percentage of GDP, over the next six years;

Countries like Greece, Italy and Portugal are in trouble, but the eurozone, as a whole, is substantially less indebted than the US. Could you imagine the IMF proposing such a tax to American voters? Now that would cause an outcry. Also, what about the notoriously spendthrift Japanese? Their debt-to-GDP ratio is the worst of the bunch.

In its proposal, the IMF has failed to weigh the social, moral and ethical implications of its imagined levy. It wasn’t because governments spent too much that debt grew to unbearable levels, but rather because the banking system engaged in too much leverage. In the end, the banking system failed and, to avoid bankruptcy, governments had to bail them out. This resulted in the giant increases in public debt.

If I’m correct in this assertion, then the banks should have been the first to pay their failure, not governments, let alone savers.

If any government follows the IMF’s advice, they are going to create a massive headache for themselves. It is very hard to see how people would trust that such an event wouldn’t be repeated. After all, these “one-off” events have a nasty habit of repeating regularly at the moment. Over time, deposits would most likely decrease, which would have deeply negative consequences for future consumption.