The Willie Sutton Asset Search

by Martin Harris

You know a financial concept has achieved high-respectability status when it is awarded advocacy space in the editorial column of The Wall Street Journal, and that’s what has just happened with a fairly desperate governmental revenue search as it has begun to focus on a promising new target: citizen wealth. The government leading the charge, at least in terms of publicity for now, is that of Cyprus (actually, about ¾ of the Eastern Mediterranean island, the other ¼ being Turkish-owned and not in financial distress) which, although small in economic stature (its GDP, at $24 Billion, is slightly less than Vermont’s $26B GSP, 50th in a ranking of the States) is so Westernized and sophisticated that, like its larger models, its pols have learned to deficit-spend their government into imminent fiscal distress as they buy votes with freebie hand-outs. Now in acute need for a bail-out by the rest of the Euro-zone, the Cypriot Parliament proposed a wealth-tax on private-sector bank deposits to build up its governmental bank balance, but deemed it prudent self-survival policy to reverse course (temporarily?) when severe civil unrest threatened the Parliamentarians’ own paychecks and well-being. (Which explains why Western re-distributionist governments are top-priority-fearful of a middle-class citizenry armed with potential insurrection weaponry like AR-15’s, and don’t care much about an under-class citizenry armed with, and using on each other, street-gang weaponry like Saturday-night specials.)

The WSJ proposal is one for a wealth-tax on big depositors (Cyprus has chosen to make a governmental profit by becoming a sort of Near Eastern Cayman Island by catering, no-questions-asked Switzerland-fashion, to holders of flight-capital, mostly Russian, in return for a lot of off-the-top skimming via licensure) and exemption for smaller (below E100,000) accounts, but differs from the previous asset-grab attempt in that the larger depositors would get stock certificates in return, with a potential stake in the eventual recovery of the re-organized banks. The government would get the money now, at the cost of only paper, ink, and four-color-press time, and with its coffers partially re-filled with the required $7.5B, would get the $13.5B Euro-zone bail-out it needs. No word, in either the original Parliamentarian proposal or the present WSJ proposal, of Cyprus reducing governmental spending to match reasonable revenue projections; but then, no other Western nations’ pols (see the US and UK examples) seem either open to, or even capable of, doing just that. To get their stock certificates (think the Erie Railroad fighting off Cornelius Vanderbilt by printing lots of new ones in 1869, the tactic of the same Jay Gould who was involved in Rutland-and-Washington RR finances) the big depositors would experience a 40% asset-tax, euphemistically called a “hair-cut” in modern Wall Street parlance. And no word in the WSJ proposal, of the holders of flight-capital actually fleeing after what they’ve already experienced and/or might soon experience. Anticipating just that bank-customer reaction, the Cypriot government has already closed the banks for more than a week, and is proposing a capital-asset export ban to keep the depositors’ funds on the island when the banks eventually re-open.

There are some interesting parallels –Cyprus and Vermont– in this situation, and the close similarity of economic size is only one. More so is the similarity of the targeted bank deposits: in Cyprus, because of its success in attracting flight-capital, they are reported at four times the size that a “normal” $26B economy would generate; in Vermont, the latest FDIC State Profile shows that total bank assets are now in the $6.2B range. How much of that is more-highly-mobile flight-capital, we don’t know, but we do know that recent influx of passive income has been the marker for a Census Bureau survey of the US to identify “rural gentrification” counties, and half of Vermont’s 14 are now so identified. Other than the legitimacy of source, there’s not much difference between Russian flight-capital in Cypriot banks because of upper-income-and-wealth investor decisions, and American flight-capital in Vermont banks for the same reasons.

As of this writing, the latest Cypriot deposit-tax proposal calls for a 25% levy on the above-E100,000 depositors, whose deposits make up ¾ of the total. Under the WSJ proposal, they’d get stock certificates, so that overt asset-grabbing could be denied, although forced investment (perhaps more politically palatable) would have to be conceded. Applied to Vermont’s present $20 Million budget shortfall (the Guv puts it at $34M): taxing only the top ¼ ($1.5B) at 2% would raise an instant $30M, not counting the cost of new four-color stock certificates. Surely this variation on the Cyprus-WSJ models has crossed the minds of the “brightest people in the room” under Montpelier’s Golden Dome. It’s already on the agenda of some Progressive-activist groups in Burlington, where they have aligned themselves with Occupy-Wall-Street and demanded a 1% tax on all financial transactions, including but not limited to, on-demand bank deposits and withdrawals. Unanswered question: would even that lesser-percentage forced-investment trigger the flight of highly-mobile flight capital?

In Cyprus, the “brightest people in the room” (and keep in mind that their financial-management ancestors invented copper-ingot money almost 4000 years ago) have already answered “yes”; in Vermont, even a “mere” 2% cash-for-certificates might well be a similar trigger, and not just for wealth-holders in the immediate target zone. Then the follow-up question would be: can Vermont legally prevent capital flight? And the short answer, for Constitutional reasons, would appear to be “no”. A longer answer would be that a State with the impressive hubris-level needed to attempt taxation of interest on Federal obligations (ultimately, of course, it failed) would at least give asset-export embargo a legislative endorsement, if not outright new-law invention. Theoretical arguments for asset-exit fees are already under construction in States which have already experienced substantial capital flight.

They’re aimed at selected “tax-minus” targets, folks who, State governments in places like CA, MD, and NY are being urged to define, have received more funding for, say, education, than they paid in through property taxes. An ex- NJ family with 1.5 K-12 students, for a VT example, arriving just before Grade K and leaving just after Grade 12, would have taken out somewhat over $200 thousand in per-pupil spending and would have paid in maybe $40K in school taxes. Leaving without paying the difference wouldn’t be “fair”. As Willie Sutton said of his own asset-searches, banks (or, more precisely, their at-least upper-middle-class depositors) are where the money is.