Tuesday, March 19, 2013

Taxation and Cyprus... and Russia

"Taxes are the price we pay for a civilized society."  

Justice Oliver Wendall Holmes said that in 1904.  It's over the door to IRS headquarters in DC so it must be true.  

(Full disclosure:  I am a retired IRS tax collector and international tax collection consultant.  This blog began life as "TaxBlog" but that was far too limiting for what I wanted to say.)

I accept the principle that we need to fund our government and taxes are the right way to do it.  Nothing else makes sense, except to anarchists.  I leave to our lawmakers the what and how of taxation.  It is a difficult but necessary job.  It's also a job that no one in Congress is doing these days.  The cries and promises of "tax reform now" go unheard and unfulfilled.

Cyprus had a novel tax idea:  "Let's close the banks and take money out of everyone's savings accounts."  Really, that's what they proposed to do.  Close the banks for a day;  no, make it two days;  no, now it's three.  Create an electronic siphon and funnel between 6.75% and 9.9% out of all savings deposits and into the treasury. The Boss Hog at IMF was all for it.  “Now is the time for the authorities to deliver on what they have commented,” she said. (Thanks, NY Times)

Can you say "bank run?"  Oh, yeah.  It's already happening, as Cypriots are withdrawing money in excess of the anticipated tax via ATMs.
"The governor of the Cypriot central bank, Panicos Demetriades, warned lawmakers on Tuesday that as much as 10 percent of the €65 billion in deposits placed in Cypriot banks would flee the country as soon as banks’ doors open Thursday morning, should Parliament approve the deposit tax." (NYT again)
Did I mention that a whole lotta Russian expat money is on deposit in Cyprus?  
"On Tuesday, Russia’s envoy to the European Union, Vladimir Chizhov, said in Brussels that the levy was “similar to forceful expropriation,” and warned that “the whole banking system can collapse,” Reuters reported." (NYT) 
Didn't the Russians invent "forceful expropriation?  The Russians - and all other depositors -  are Cyprus' neo-kulaks.  Remember them?

Nicosia (the capitol) didn't bother to consider any possible consequences. They  include:
  • Massive social unrest and possible (probable?) rioting
  • Complete loss of public confidence once the banks have re-opened, leading to a run on whatever savings accounts remain
  • Resulting collapse of the banking system - no money to lend = no banking
  • Unwanted foreign profiteering and intervention
  • A new government that at least promises not to steal citizens' money
All this is because Cyprus has spent itself into debt from which it cannot recover.  Ever.  This idea was part of an EU bailout, by the terms of which Nicosia would come up with €6Bil and the EU would lend €9Bil.  Since Nicosia didn't have €6Bil to spare, they had to come up with it somewhere.  Theft under the banner of taxation.

Now the government is trying to wiggle out of their self-inflicted disaster.  "Oh, we didn't meant that, silly Cypriots."  We meant Someone Who Isn't You.  See my  posts HERE and No, Really, You're Gonna to Pay More Tax and Neo-Kulaks and Someone Who Isn't You and Free Mexican Food

As I was writing this, Cyprus' parliament voted the measure down.  They called it a "stability tax."  Thing is, they voted it down after they enacted it.  How does that work in a democracy?

"After midnight, negotiators thought they had a proposal that could work: a one-time “tax” of 12.5 percent on depositors with $130,000 in the bank and milder but still painful cuts of around half that or less for everyday account holders."  (NYT)

Does that sound familiar?  Think "tax the 1-percenters!"  After all, they can afford it... can't they?  Maybe, until they can get the rest of their money outta Dodge.  Or Nicosia.  Now that this has failed in parliament, they're gonna have to re-open the banks sometime.  

Imagine that you had your life savings in a Cypriot savings account.  Would you leave it there and assume this isn't going to happen again?  Not only would I not do that, I would rid myself of euros as much as I could.  Can the EU survive if that becomes widespread?

Who could have seen this coming?  Oh, you?

"The Russians reacted angrily to a so-called stability tax on deposits in Cyprus, and at being left out of the negotiations."  (NYT)  No surprise there.  Anger is the Russian default emotion and their ox is being gored this time.  

Putin has offered The Russian Plan.  It's simple:  Give us your (extensive) oil rights and we'll bail you out.  "And own you forever" goes unsaid. Russia already provides most of Europe's energy.  Why not a little more?  That whole free market thing is such a nuisance.

All EU countries are interlinked.  What happens in each affects the others.  Germany is strong, Spain is a basket case, the north is bailing out the south and so forth.  There's going to be a full-scale world banking crisis if the the euro weakens dramatically as a result of a Cypriot bank industry failure.  Then who's going to bail out the next failure.  Greece, anyone?

The Russian Bear is licking his chops.  I warned of this three years ago, in Katyn, Bishkek and You:
"Russia isn't quiet.  Russia isn't sleeping.  Russia is coming soon to a country near you. "

---  Welcome Swedes!  For some inexplicable reason, I've been getting a number of page views from Sweden.  It feels good.  Keep coming back and please comment as you wish.

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When a new source of taxation is found it never means, in practice, that the old source is abandoned.  It merely means that the politicians have two ways of milking the taxpayer where they had one before.
-- H. L. Mencken

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