Tuesday, March 19, 2013

This is bound to upset some people ...

I'm not a fan of QE (a monetarist fantasy which only causes stagflation in import dependent countries), the bait and switch of private debt to the public purse nor the original proposed Cyprus wealth tax.

I am a fan of Government's acting more like pirates especially when they're the lender of last resort, defaulting on sovereign debt where necessary, forcing nationalisation when in the nations interest and letting organisations fail when it's not, use of Keynesian style investment approaches to overcome inertia in industry (a particularly problem in this phase of the economic cycle, otherwise I'd be suggesting a Hayekian approach), the deliberate gaming of the economic system to serve a nation's interests and the introduction of EU bonds for raising debt centrally and preventing financial markets pitting one country against another.

I am also a fan of introducing a one off wealth tax. In fact, I'm actually a fan of using more wealth tax longer term over income tax as a means of redistribution given that money gravitates towards money. There has never been a trickle down effect only a trickle up.

Ideally with a wealth tax you'd hit all asset classes (shares, property, deposits etc) and all legal persons (individuals, corporations etc). You need to protect the poorest with high minimum thresholds, you'd need to apply a progressive rate of taxation and you'd need to minimise the efforts of persons to shift assets around to avoid the tax.

In the case of Cyprus, I'm glad that they have rejected the existing proposal. However, this does not mean I believe that they should reject a one of wealth tax outright. They still have time before the banks re-open (since they control this) to reorganise this to a more targeted system.

Whilst the hitting of deposits alone (a single asset class) is blunt and will inevitably create unfair situations, the entire economic mess is going to cause some haircuts. It is better that those who can most afford the haircut are the ones who bear the brunt. One thing I did particularly like about the Cyprus approach was the suggestion that those hit by the wealth tax are given shares as compensation in the institutions which are at the heart of the problem. If it all recovers, you get your money back - or at least that is the the notional idea.

You'd have to run the numbers but let us say for sake of argument you create a minimum threshold of 200,000+ Euros with a starting rate of 5%, increasing to 15% for 1 Million Euros+, 30% for 2 Million Euros+, 50% for 5 Million Euros+ and 80% for 10 Million Euros+. You would in effect create the safety net protecting the poorest whilst creating a more balanced taxation on those who can afford it including companies, wealth funds and all organisations who under EU law are considered "legal" persons.

It's an imperfect system, one which should be followed up with a more general wealth tax on all assets balanced with a reduction in income tax. However, as a short term measure - this is one which in my view has merit across all of Europe and not just Cyprus.

[Update 23rd March 2013]

Apparently Cyprus is looking at 25% levy about 100,000 Euro. It's a good step in the right direction. According to the Guardian, Russia is sabre rattling - given that when banks open Russian capital is likely to flee, then Cyprus may as well introduce a more draconian regime i.e. up the threshold but increase the rate in a progressive manner (as above) penalising all accounts above 5 or 10 Million Euros with a tax rate of 80%. Actually, you might as well go the whole hog and impose a 100% rate above a certain level ... say 20 million Euro.

It's an imperfect system but Cyprus needs to hold their mettle and act like pirates.

[Update 27th March 2013]

In what has become a farce, it seems that capital controls were not applied effectively and many of the  high value deposits have been allowed to flee.