Cyprus Hypothetical - Tax on Bank Deposits

[Red Cedar PM]

I am trying to settle an argument. An ultra-conservative friend of mine thinks that Obama is going to take a page out of Cyprus' book and "tax" (he used the word steal) bank deposits. I told him that even if Obama wanted to this would realistically not be possible because such a tax would likely be a direct tax which wouldn't fall under the purview of the 16th amendment and thus would need to be apportioned under Article I Section 2.

Not trying to start a political discussion. I am just a two-bit CPA and not a lawyer so I'm just wondering what the experts here think. TIA

[Famspear]

Yeah, a tax on bank deposits could very well be considered a direct tax. That is, if the tax were structured in such a way that a deposit account as of a given date (say, January 1st of each year) would be subject to the tax, that sounds like a property tax. That would probably be considered a direct tax. Since it would not be an income tax, it would have to be apportioned.

[Cpt Banjo]

If structured solely as, say, an annual tax on all bank deposits based on the January 1 balance (easly avoided -- simply withdraw everything on New Year's Eve; better to impose it on the average balance for the entire year), it would certainly be a direct tax. But suppose the tax were limited to deposits in federally-insured banks? A case could be made that such a tax would be an excise upon the "privilege" of keeping money in a federally-insured bank, and excises needn't be apportioned.

Or suppose the tax were imposed on each deposit at the time it was made? It seems to me that such a tax would clearly be an excise, regardless of whether the bank was federally-insured.

[JamesVincent]

But would having a bank account be considered an excise per the law? Thats kind of a weird one that I havent heard yet. If you collect SS now you have to have direct deposit since they will not issue checks anymore so it wouldn't be a luxury anymore I would think.

[Cpt Banjo]

Excises aren't limited to luxury taxes, but include taxes on transactions or events. A tax on each deposit would be a transactions tax, and such taxes are clearly excises. (For example, we had a federal stock transfer tax from 1914 to 1966.)

A tax on the average daily deposit balance for a calendar year in a federally-insured bank would be different. But so far the only taxes the Supreme Court has said are direct are capitations and taxes on the mere ownership of property, and a tax on deposits in federally-insured banks would be neither. In other words, such a tax wouldn't be a tax on the mere ownership of property because an additional element would be required: the deposit would have to be kept in a federally-insured bank.

[Famspear]

.....But so far the only taxes the Supreme Court has said are direct are capitations and taxes on the mere ownership of property, and a tax on deposits in federally-insured banks would be neither. In other words, such a tax wouldn't be a tax on the mere ownership of property because an additional element would be required: the deposit would have to be kept in a federally-insured bank.

Yeah, or to put it another way, tax would be imposed on the event -- the act of making the deposit -- rather than on the balance in the account itself. I think you've hit it on the head; the tax on the act of making the deposit would be an excise (and would not required to be apportioned). A tax on the balance of the account as of a given date (say, once a month, or once a year) would be a property tax -- a direct tax.

[Cpt Banjo]

A tax on the balance of the account as of a given date (say, once a month, or once a year) would be a property tax -- a direct tax.

I'm not convinced this would be the case, especially if the deposit were in a federally-insured bank. The argument would be that the tax is not on the mere ownership of property -- rather, it is an excise upon the privilege of having one's deposit federally insured.

Given the Supreme Court's extreme deference to Congress in matters of taxation (most recently exemplified by its regrettably superficial discussion of the direct tax issue in National Federation of Independent Business v. Sibelius), I would lay odds that the Court would uphold such a tax.

[Red Cedar PM]

If structured solely as, say, an annual tax on all bank deposits based on the January 1 balance (easly avoided -- simply withdraw everything on New Year's Eve; better to impose it on the average balance for the entire year), it would certainly be a direct tax. But suppose the tax were limited to deposits in federally-insured banks? A case could be made that such a tax would be an excise upon the "privilege" of keeping money in a federally-insured bank, and excises needn't be apportioned.

Or suppose the tax were imposed on each deposit at the time it was made? It seems to me that such a tax would clearly be an excise, regardless of whether the bank was federally-insured.

It seems that Cyprus was proposing to simply take some percentage out of each account as of a certain date as a tax. In fact, the mention of the tax caused Cypriots to withdraw tons of money out of ATMs over the weekend, when in fact it would have been pointless because the banks would have used the balance in the accounts as of a date before this was announced to calculate the tax and froze enough money in each account to be sure they could cover the tax without becoming overdrawn.

This all seems moot now as the Cyprus bailout proposal that had the bank deposit tax tied to it went down in flames in the Cyprus parliament.

http://finance.fortune.cnn.com/2013/03/ ... un/?iid=EL

[AndyK]

What if:

Instead of a "tax," a "fee" were imposed as a percentage of all deposits in any FDIC bank -- said "fee" allegedlyh designated to the support of the FDIC with an y excess going to the Treasury general fund.

In such a scenario, there is no longer a tax (subject to Constitutional limitations) but a user fee subject only to the whims of Congress.

Of course, such a "fee" would equate to "do not re-elect me"

[Burnaby49]

All just academic speculation. Any "tax" on bank deposits in the US, no matter how imposed or legally established, would have the same popular support that it had in Cyprus. Even in a theoretical world where Obama could impose such a tax the national firestorm would result in a congressional vote to reject it with about the same skewed results as recorded in the Cyprus parliament (36 against, 19 abstentions). Members of congress aren't about to commit political suicide to support a president who proposed this hare-brained scheme. See how well it's worked for the EU!

[notorial dissent]

I pretty much agree with AndyK and Burnaby49, this would be pretty much a congresscritter do not pass go, do not collect $200, go straight to the unemployment line, after they had been properly tarred and feathered.

I'm still trying to wrap my mind around whatever the rational was for the EU to even propose such an item, except maybe that it was Cyprus, and nobody much cares about them. The EU has a history of highhandedness, but this is a new level I think.

[Burnaby49]

I pretty much agree with AndyK and Burnaby49, this would be pretty much a congresscritter do not pass go, do not collect $200, go straight to the unemployment line, after they had been properly tarred and feathered.

I'm still trying to wrap my mind around whatever the rational was for the EU to even propose such an item, except maybe that it was Cyprus, and nobody much cares about them. The EU has a history of highhandedness, but this is a new level I think.

An article in Der Spiegel says it was concocted by Angela Merkel largely for local German consumption. German public feeling is very anti-bailout because they feel that massive quantities of German taxpayer's money is being squandered to bail out lazy corrupt southern economies. Since Cyprus is essentially irrelevant to any bigger picture issue and German feelings against a bailout are even higher than usual (because of the perception that German money is being used to protect bank deposits that belong corrupt Russian autocrats) Merkel decided to drop the hammer on them. Shows everybody else that Germany has had enough of financing Europe and gives her big political points for the national elections in September. Cyprus has until Monday to agree or, at least at present, the EU says a bailout is off the table. We'll see in a few days who blinks.

[notorial dissent]

I wasn't aware of that particular wrinkle, haven't been really paying much attention truth be told, but did know that Germany was getting a bit twitchy about all the ongoing bailouts, since a big portion of the money is coming out of their pockets, and they AREN'T happy about it, so can't say it surprises me in the least. Right now there is a lot of resentment towards Germany precisely because they do have the deep pockets to fund the bailout, and it isn't going over well in certain sectors, big surprise. The multi-billion euro question, is how long, can or will they keep on doing it? Since Merkel ultimately has to answer to the voters at home, that is a really really big question, as opinion in Germany it appears is riding against it now. I don't know when the next round of elections in Germany are, but I would start watching for her attitude to change drastically as they approach.

[Burnaby49]

My mistake! I tried to link to Spiegel, a free site, but couldn't find the article. It was much closer to home, in today's Wall Street Journal, a pay site. Even though I can't link I'll give a few short quotes that give the general idea:

BERLIN— Angela Merkel's re-election campaign moved to Cyprus this week. Hundreds of Cypriots, irate over a European plan to tax their bank accounts, marched through the streets of Nicosia, some hoisting signs depicting the German chancellor in full Nazi regalia. "Merkel U stole our life savings," read one banner. Ms. Merkel, who faces a general election in September, couldn't have hoped for a stronger endorsement.

"Merkel has nothing to lose in Cyprus," said Ulrike Guérot, a senior analyst at the European Council on Foreign Relations in Berlin. "She gets to play the role of defending German interests."

[notorial dissent]

I do think the Cypress situation is going to be a real hotspot, but have no idea how it will pan out. I know they are making overtures to Russia, but don't know what hte reception there will be either.

[The Observer]

I read earlier this week somewhere that the Russian connection was mainly due to the fact that there numerous offshore accounts in Cyprus that catered to Russian citizens, that in fact that the reason for a Russian bailout offer was so that the oligarchs wouldn't see these accounts get tapped.

[notorial dissent]

I think you pretty much got it in one. There was some crack on a news program I was watching that at times there a are more Russians in Cyprus than Cypriots. Russia needs a money haven, and it looks like this was more convenient than Switzerland or the Channel Islands, which aren't so convenient any more. On the plus side, this could be a growth industry for Cyprus and Greece. From what I've heard recently, some of those Russians could buy Cyprus out of petty cash and solve the whole problem.

[Number Six]

As usual the uber-gold bulls are sounding the red alert on the Cyprus bank event:

"Today legendary trader Jim Sinclair told King World News why Lagarde’s IMF Cyprus disaster may cause far more damage than the frightening turmoil the world witnessed during the collapse of 2008. Sinclair, who was once called on by former Fed Chairman Paul Volcker to assist during a Wall Street crisis, was also joined in this interview by Britain’s very popular MEP Nigel Farage, and former US Treasury Official, Dr. Paul Craig Roberts.

"Sinclair: “The propaganda being put out in the mainstream media is a message that things are moving along in Cyprus, and there will be a positive conclusion. The mainstream media is saying this is a banking problem of minor significance.

"This is Joseph Geobbels style propaganda at its finest because Cyprus will ultimately be seen as a defining event in history. The term ‘Bail-In’ really doesn’t define what it is, which is confiscation. It’s the removal of part of your deposit."
http://www.jsmineset.com/2013/03/23/sin ... -collapse/

[Burnaby49]

Let's be more precise. The agreed solution is largely a skim off of the deposits of Russian oligarchs who have plundered their country and parked the money in Cyprus banks. It sits in Cyprus rather than say Switzerland or Britain because the Cypriots have no legal scruples about taking tainted money and the banking system has been specifically tailored to accommodate Russian expatriate funds. So there is not a lot of sympathy for the losses that will be sustained by the depositors and few are taking this bailout as a stand-alone crisis. The concern is whether the EU will get a taste for grabbing bank deposits elsewhere, say Italy, which would be a major issue. If this is a one-off it will not be a big issue outside of Cyprus.

Inside Cyprus however it is a crisis. The problem is that the banking industry in Cyprus is so disproportionately huge compared to the rest of the very marginal economy that it is the driving economic force for the country and if it crashes the entire country will go down with it. This is why the Cypriots rejected the first EU solution and desperately tried, and failed, to find one that would not adversely affect their big bank depositors. This crisis was inevitable once Greece reneged on its government bonds because these were the Cyprus bank's primary investments and they have suffered irrecoverable losses.