Golden Geese in Flight

by Martin Harris

Pundits in the “chattering class” in American media have been on overtime recently, with (just ask them) highly perceptive and insightful commentary on the wealth-tax incident in Cyprus, whereby the (mostly Russian oligarch) holders of the largest bank deposits (several reports call it the “top 10 percent”) are being subjected to a 40% asset-confiscation by Cypriot government, so that it can then show European Union governors that it deserves a $13 Billion bail-out to correct, partially, its freebies-for-votes chronic deficits and total debt. Interestingly, much of the Nicosia problem was imported from Greece proper, through purchase of Athens bonds funding freebies-for-votes there. “Could it happen here?” the talking heads and typing hands ask in anguished phrases so artfully phrased that, if the unthinkable were to happen, their locutions couldn’t be held against them. Here, in flyover (their phrase) red-State country, opinions are more bluntly voiced: for more than a score of years, now, the Wayne Cryts observation (he was the Nevada beef-herder who successfully resisted Federal confiscation of his water supply) that “if you can’t own and use property, you are property” has been appreciated and repeated throughout farm country. Founding Father James Madison correlated “life, liberty, and property” in the Fifth Amendment, but more recently Progressive-Leftist Cass Sunstein has claimed that there could be “no liberty without taxation”, presumably of wealth as well as income, transaction, travel, excise, license, consumption, depletion, gaming, communicating, inhaling, and so on.

Both Right and Left argue that no American wealth-tax examples exist, choosing to ignore or re-define such older and well-known historical facts as the property tax, the inheritance tax, and the intangible assets tax, and such newer and less-well-known State governmental efforts to control private wealth by preventing its out-of-jurisdiction movement. National governments already have such limits to, and controls over cross-border wealth transfer. Now, Cypriot-pol plans to prevent capital flight (once better known as “bank runs”) caused by their own wealth-tax imposition are being argued as uniquely innovative and emergency measures, but try carrying undeclared cash or gold on an international aircraft route and you’ll be quite routinely detained (or worse). Any jurisdiction which can prevent asset-removal gets to continue taxing its revenues as income in eager anticipation of being allowed, Cyprus-fashion, to take an annual bite of the asset itself. Think the New Jersey example, now under consideration in other States, of requiring an escrow deposit from every resident-departure real estate sale, supposedly to cover debts which might be exposed later. Or think the Vermont example, similarly in practice in other States, of conveniently delaying the statutorily-required downward assessments of properties (and thereby reduction of property taxes) as fair-market-values fall during a mini-recession, because, as a Middlebury official explained in the early 90’s, “our schools can’t afford the cuts.”

The recent re-definition of “capital control” to describe prevention of capital-removal by holders apprehensive over confiscation by government –think the Cyprus example now causing bank run fears in other debt-burdened EU members like Italy and Spain (it’s already started in Greece)—is an ironic revision of its earlier meaning: a government’s bank-governance responsibility to insure that banks actually attract and hold enough assets to justify their outstanding loans. Now, regulation of banks has been superseded by regulation of its customers. Cypriot banks (another irony: the Greek word for “bank”, trapeza, which originally described a temple-forecourt table or bench for food, sacrifices, or money-changing, in English now describes a circus-act accessory) attracted foreign deposits with above-market interest rates, and did so with FDIC-type guarantees for capital safety, but are now re-labelling them as shareholder-type risk investments to justify the supposedly one-time, unique, 40% confiscation. Other depositors, in Cyprus and elsewhere, aren’t convinced. That explains two sets of owner behaviors under such circumstances: one for those whose property can be flighted out, and one for those whose property can’t.

Capital can, of course, take flight to safer investment destinations. That’s why Cyprus now wants “capital control”. And that’s why foreign capital has been flowing into the US recently at far higher rates than US capital is going foreign. To seek to limit or prevent such flows would contradict all that the global-economy advocates have been preaching since the Bretton Woods financial conference in 1944, and all that the European Union advocates have been preaching since 1951. Within a nation, investors can buy shareholder positions (or sell them) as they see opportunities for profit from innovation, productivity, marketing, or management. Those who seek to tax each such transaction must presumably wish their continuance, but they need to recognize that a new tax on Vermont bank or investment transactions will swiftly move those transactions across the nearest border: think New Hampshire for retail sales. Even the transaction site can easily be moved: think the Chicago Mercantile Exchange’s recent move from downtown to the western suburbs, where it has a new data center, and the New York Stock Exchange’s multiple departure-from-Wall-Street threats, which harvest a periodic bribe-to-stay from NY taxpayers.

Real estate can’t take flight. But its commercially significant owners can, which explains why Entergy wrote off 2/3 of the value of Vermont Yankee last year, from $517 Million to $162MM. On close-down (recommended by Swiss investment bank UBS) its value (actual-for-power and taxable-by-VT)) will be near zero. It also explains why IBM has chosen not to make further major investments in its Essex campus, directing construction (and subsequent research and manufacturing) instead to places like Fishkill, NY, which now harvest the taxes. In ill-governed places like Detroit and the South Bronx, owners abandon holdings totally; in Baltimore, City Hall tries to attract brave new owners with $1 sale pricing for handsome, but dangerous-after-dark, marble-stoop 19th century townhouses. Such asset devaluation is somewhat tax-deductible to owners, but a near-total loss of revenue from asset-taxation to governments. In short: real estate isn’t the no-escape, sure-thing golden goose egg that States and local governments have thought it to be. Not only because of the California and Massachusetts type of tax rebellions, but because capital controls lead to capital flight. Those in government, whether in Nicosia or Montpelier, might want to re-read Aesop on “Killing the Goose that Lays the Golden Eggs.” Some ancient mainland (Thrace) Greeks were smarter than some modern island (Cyprus) ones.