Cyprus is a small island country in the Mediterranean. Their government did something last week that should be a wakeup call to all citizens of debtor nations. In order to continue to receive support in the form of loans from the European Union, they agreed to tax 10% of all bank deposits. They later withdrew this idea after public outcry, and it is not clear what their ultimate solution will be. The reason it is important is that it shows what governments will do when they are desperate. When the U.S. debt crisis comes, and there are no more buyers of our bonds, our government will take a similar step.
There are many particulars to the problem in Cyprus that are not the same as the United States’ debt problems. The problem there was caused by the banking system making bad bets on Greek debt. These differences are important, but it really doesn’t matter how a debt crisis begins they all lead to similar decisions. What is instrumental is that when confronted with a crisis, the first reaction was not to slash costs, cut employee benefits, or lay people off. There are no calls to cut retirement programs, or shrink the government. The reaction was to go get money from those who have it.
Those media outlets that chose to cover this story were quick to put analysts on the air to remark about how FDIC insurance and personal property rights in the Constitution would not allow this type of step to happen here. FDIC deposit insurance is only a protection in the event that your bank becomes insolvent or declares bankruptcy. There is nothing in our Constitution that prevents the implementation of an Asset tax. The Congress can pass a law that grabs a certain % of all deposits in lieu of a later tax return (think withholding). When the United States cannot sell bonds in order to borrow more than it spends every year, the budget will need to be balanced immediately. The total assets of the United States amount to roughly $188 Trillion, is it so inconceivable that a future government faced with this situation will just tax assets 1% every year, thus solving their problem?
How this look into the future relates to the current budget standstill is an interesting exercise. Republicans are very concerned about the country’s current and mounting debt. The recent budget put out by the Republican Party gets the budget to balance within ten years. They also address the future drivers of our debt, namely the entitlement programs of Medicaid and Medicare. Democrats are not all that concerned about the debt, and have put out a budget that proves this. They are not that concerned about getting the budget to balance, nor do they choose to address any of the unsustainable entitlement spending. In a recent interview with ABC news, the President said, “My goal is not to chase a balanced budget just for the sake of balance.” Is it just a coincidence that the party which does not want to raise taxes makes hard decisions to bring the budget into balance, while the party that seems to relish raising taxes doesn’t think that balancing the books is all that important?
We have been given a look into how government leaders react to a debt crisis with the events in Cyprus. They go after who has the money for immediate relief. Why will our politicians be any different in a debt crisis? When you need to balance the budget immediately, taxing assets will be sold as the only solution. This is why Democrats don’t really care if the debt keeps going up, or if we ever solve the long term unfunded liabilities. They look at America as one giant piggy bank, and when the crisis hits they will be all too happy to act as a hammer to crack it open.