by Martin Harris
Midway up on a list of fun-things-to-do is watching politicians re-group after a resounding rejection. It’s a reminder of the primary-school years when some hapless fourth-grader, given the right answer by the teacher just after offering a wrong one, defends with “I knew that”. Two recent examples: the sudden US Senatorial decision, after a preliminary vote-count, not to try for a ban on “assault rifle” appearance hardware; and the swift Cyprus Parliamentarian decision, after mobs took to the barricades there, not to try for a wealth-tax on bank deposits. In a sort-of defense for the Eastern Mediterranean island pols, they seemed to be on better logical grounds: after all, three-quarters of the targetable deposits were held by wealthy foreigners, mostly Russians, who can’t vote on such matters (except with their feet), and the pols assumed (wrongly) that the locals with small deposits would enjoy watching evil “flight-capital” foreigners taking a “hair-cut”, new financial lingo for an unexpected loss. First domestic reaction: the “wealth-tax” phrase has now been replaced with the “asset-tax” phrase, maybe because our verbally skillful pols “knew that” choosing the right label makes all the difference in dealing with us, the dumber 90% on the IQ curve.
It hasn’t taken long for the subject to earn substantial column-inches in the sole still-profitable major US newspaper, The Wall Street Journal, where both paid staffers and unpaid LttE writers have offered US examples of asset-taxation, some overt but most covert. In the former category is, primarily, real estate, where the annual take is a percentage of the actual value; and secondarily, intangible assets like investments, presently taxed by Florida and occasionally proposed elsewhere, not as a percent of any income stream but as a percent of the actual value. Favorite WSJ writer target: the Federal Reserve System, which since 1913 has been charged with the (formerly Congressional) Constitutional task: to “coin money and regulate the value thereof”.
Mostly, the writers criticize present-day Fed Chairman Ben Bernanke for two covert asset-taxation policies: one is the printing of trillions of dollars in new fiat currency, thereby deliberately reducing the purchasing power of money already earned, taxed, and saved by US citizens; and the other is the deployment of those trillions to push interest rates down close to zero, thereby reducing the value of those savings, in interest-flow terms, to near zero, both actions taxing assets, not earnings from asset-revenue of asset-sale profit. In percentage-of-value taken, the actions of the Fed here, in the last decade, have taken more than the 10% of asset value which the Cypriot Parliament thought it could “off” from (mostly-foreigner-owned) bank deposits there, in the last few days. The Parliament retreated in defeat; the Fed has barely been questioned, except by the occasional pol –Ron Paul—or the occasional economist –Harry Dent. Over the longer term –the century since the Fed’s founding—the Purchasing Power calculator on the Economic History website shows that the dollar has been “offed” in value, over the 1913-2010 period, by such covert taxation, to the level where it now takes $22.70 in dollar assets to equal what $1 bought then. That’s a 96% asset-“offing” tax, not even counting two more recent, Federal Reserve heavy-printing-press-use, years, each with average inflation well over 2%. The absence of broad national publicity for this track record is striking: back in the 70’s, the sharp rise in California property taxes (which eventually triggered the Howard Jarvis campaign for a Prop. 13 which would limit property tax to 1% of asset value) generated much more national discussion of just how, when taxes go up, asset value goes down because the cost-of-ownership rises. That’s the mechanism whereby real estate, typically taxed at the local or State level, can be a target asset just like any Cypriot bank deposit. Consider, for example the Massachusetts Prop. 2½, limiting total property tax an any asset to 2.5% of FMV, and similarly limiting any annual increase to 2.5%, so that, in a given year, the tax might rise from 2.5% to 2.56%, and not any more to the 3.5 or even higher percent which MA taxpayers had previously experienced.
A tax which costs the owner 2.5% of his $200,000 house-asset takes $5000; one which takes 3.5% takes $7000. The annual cost of ownership goes up $2000, which means that, using, say, a 5% interest rate (some well-run utilities still pay that in stock dividends) the asset value goes down $40,000, the capitalized value behind an added $2000 expense. Currency-inflation levels causing property-value inflation in the 2-to-3% range (most recent history) can keep up with 2-to-3% taxes, the owner can try to convince himself; but the CA and MA increases of the 70’s and 80’s were not so concealable; hence the tax rebellions. And hence the apparent reluctance of the Vermont (State) property tax managers to propose substantial annual increases: they’ve seen what happens when the natives get restless. That’s why they tax properties which don’t send kids to school (are tax-plusses, that is) at $1.44 per $1000 of FMV, while taxing residences most of which do (and are mostly tax-minusses) at $.94 to cover just the Base Spending Rate of $9,151 per pupil. And they don’t talk much about the added local tax, to make up the difference between $9K and the nearly $16K most districts actually spend, thereby nearly doubling the total tax take. At what public-opinion point these taxes are recognized as asset-value depreciators, and not just ignored when concealed by overall inflation, varies; but, as the annual pretty-much-successful annual budget votes have again just shown, VT taxpayers have remarkably higher tolerances now than those in CA and MA in decades past. And that’s just the school side. There are Town expenses as well. Where the natives are less docile, the rulers are more desperate, which explains why Cypriot leadership now proposes “nationalization of all pension accounts” as a way to show they own (translation: have just expropriated) sufficient capital wealth to qualify for a Euro-zone bail-out. Similar proposals have been trial-ballooned elsewhere in Europe (think Slovakia) in South America (think Argentina) and the US (think 401-K accounts). In all such asset-offing, of course, sincere government promises, for faithful payout to continue, have been made.
Two observations from the recent governmental asset-offing attempts, actual or possible: the first is the instant collapse of depositor and/or investor confidence, together with capital removal to safer surroundings. As of this writing, Cyprus banks are still on “holiday” to prevent the inevitable depositor run when they re-open, and a ban on all capital export has been proposed. The second is the permanence of such confidence destruction. Mexico expropriated all foreign oil company assets in 1938, and has been trying ever since, unsuccessfully, to seduce them back in. A reputation, once created, is hard to revise.