Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Ibuprofen Warning - The Pain Killer that can Kill You! - 29th July 15
More Ritholtz on Gold, and Another Response - 29th July 15
Crude Oil Price Is Lower – and You’re Richer - 29th July 15
U.S. Home Sales Market Is Dead – This Chart Proves It - 29th July 15
Greece- What Happens When Economists Talk Politics - 29th July 15
The Gold - U.S. House Prices Ratio As A Valuation Indicator - 29th July 15
Will Crude Oil Price Decline Continue? -Video - 28th July 15
Gold & Silver Money Has Devolved Into Debt and Plastic - 28th July 15
Buy and "Own Gold Krugerrands" Says Money Expert Jim Grant, Very Bullish on Gold - 28th July 15
How to Protect Yourself from China's Crashing Stock Market - 28th July 15
Quantum Geopolitics - 28th July 15
Gold Mining Stocks to Weather the Storm - 28th July 15
Stock Market Bulls Beware! - 28th July 15
Will Chinese Stock Market Crash Affect the US? - 27th July 15
Crude Oil Price Under $48! - 27th July 15
Are We Seeing a Trend Reversal with U.S. Interest Rates? - 27th July 15
How to Know When the Gold Bear Market is Over - 27th July 15
Gold Bear Market Phase III - 27th July 15
Silver Bull Hammer Buy Signal - 27th July 15
Gold Cracks Support and Plunges to New Lows - How Low Will Price Go? - 27th July 15
Commodity Markets Breakdown Of 2015 Is Now A Fact - 26th July 15
Gold Price at a Five-Year Low: Here’s What to Do - 26th July 15
Stock Market Primary III Inflection Point - 26th July 15
Central Banks and Our Dysfunctional Gold Markets - 25th July 15
Gold And Silver - The US Dollar Does Not Exist, Part II - 25th July 15
How Wall Street Put Apple Stock in Animal House - 25th July 15
How to Trade Markets Using the Stochastic Oscillator - Video - 24th July 15
A Bond Market Crisis Is Coming... Here's What to Do - 24th July 15
Why There's Resistance to the Iran Nuclear Deal - 24th July 15
Absurd Gold Stock Levels - 24th July 15
Gold Mining Stocks Nearing Rebound - 24th July 15
Misperceptions Create Significant Bond Market Value - 24th July 15
Commodities Distressed Investing - 24th July 15
OPEC Shorts Are Driving Down the Crude Oil Price - 24th July 15
USD Index Rebounds - 24th July 15
If You’re Worried About a Tech Bubble, You’re Focusing on the Wrong Thing - 24th July 15
Gold Stocks Bear Market Bottom Buying Opportunity? - Video
The Stealth War on the United States - 23rd July 15
Commodity Prices, Gold and Silver Stocks Next Leg Down - 23rd July 15
The ‘Real’ Reason the Fed Wants to Raise Interest Rates - 23rd July 15
Crude Oil Price Slump is a Once in a Decade Opportunity to Make Money, Guaranteed - 23rd July 15
Gold Price Hits a 5-Year Low: How to Time the Next MAJOR Bottom - 22nd July 15
Silver and the Deflation Thesis - 22nd July 15
Gold Price Crash - Trend Forecast 2015, Gold Stocks Buying Opportunity? - 22nd July 15
The Three Reasons Behind Iran’s Resistance to the Nuclear Deal - 22nd July 15
Winning the Hunger Games - How to Choose Successful Agriculture Investments - 22nd July 15
Are Free Markets The Solution? - 22nd July 15
Gold Hammered “Unprecedented Attack” - 21st July 15
The Turkish Enigma - 21st July 15
Gold and Silver: The Final Capitulation Commences - 21st July 15
Greater Israel Setback from Iranian Nuclear Agreement - 21st July 15
U.S. Housing Market: Is the Roof About to Cave In (Again)? - 21st July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

IMF Proposing 10% Supertax Bail-in On All Eurozone Household Savings

Politics / Banksters Oct 12, 2013 - 08:13 PM GMT

By: Raul_I_Meijer

Politics

This is a story that should raise an eyebrow or two on every single face in Europe, and beyond. I saw the first bits of it on a Belgian site named Express.be, whose writers in turn had stumbled upon an article in French newspaper Le Figaro, whose writer Jean-Pierre Robin had leafed through a brand new IMF report (yes, there are certain linguistic advantages in being Dutch, Canadian AND Québecois). In the report, the IMF talks about a proposal to tax everybody's savings, in the Eurozone. Looks like they just need to figure out by how much.


The IMF, I'm following Mr. Robin here, addresses the issue of the sustainability of the debt levels of developed nations, Europe, US, Japan, which today are on average 110% of GDP, or 35% more than in 2007. Such debt levels are unprecedented, other than right after the world wars. So, the Fund reasons, it's time for radical solutions.

Now, there's a history to all this. WW I and WW II led to similar ideas, some of which were executed in practice. Jean-Pierre Robin even suggests that we have just resurfaced from a financial crisis that was as destructive as a war. A nice additional point is that he also says Europe and the US got rid of their debt levels through elevated levels of inflation between 1945 and 1975, but at the same time a shame he doesn't realize that can't work here. No inflation to the rescue this time around. But radical solutions.

Back in 2011, the Boston Consulting Group was pondering something even more radical, in a report called: "Back To Mesopotamia? The Looming Threat Of Debt Restructuring". As Zero Hedge reported at the time:

The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis"

[..] ... it is time to face the facts. What facts? The facts which state that between household, corporate and government debt, the developed world has $20 trillion in debt over and above the sustainable threshold by the definition of "stable" debt to GDP of 180%. The facts according to which all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing.

The facts which state that the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle-and upper-class, which, if BCG is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path. But not before the biggest episode of "transitory" pain, misery and suffering in the history of mankind. [..]

There is one thing we would like to bring to our readers' attention because we are confident, that one way or another, sooner or later, it will be implemented. Namely a one-time wealth tax: in other words, instead of stealth inflation, the government will be forced to proceed with over transfer of wealth. According to BCG, the amount of developed world debt between household, corporate and government that needs to be eliminated is just over $21 trillion.

Which unfortunately means that there is an equity shortfall that will have to be funded with incremental cash which will have to come from somewhere. That somewhere is tax of the middle and upper classes, which are in possession of $74 trillion in financial assets, which in turn will have to be taxed at a blended rate of 28.7%.

The IMF refers to a few studies, like one from 1990 by Barry Eichengreen on historical precedents, one from April 2013 by Saxo Bank chief economist Steen Jakobsen, who saw a 10% general asset tax as needed to repair government debt levels, and one by German economist Stefan Bach, who concluded that if all Germans owning more than €250,000, representing €2.95 trillion in wealth, were "supertaxed" on their assets at a 3.4% rate, the government could collect €100 billion, or 4% of GDP.

French investor site monfinancier.com talks about people close to the Elysée government discussing how a 17% supertax on all French savings over €100,000 would clear all government debt. The site is not the only voice to mention that raising "normal" taxes on either individuals or corporations is no longer viable, since it would risk plunging various economies into recession or depression.

Here's what the October 2013 IMF report, entitled Fiscal Monitor : Taxing Times, literally says on the topic, in the chapter called:

Taxing Our Way Out Of - Or Into? - Trouble

The sharp deterioration of the public finances in many countries has revived interest in a capital levy, a one-off tax on private wealth, as an exceptional measure to restore debt sustainability. (1) The appeal is that such a tax, if it is implemented before avoidance is possible, and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

There have been illustrious supporters, including Pigou, Ricardo, Schumpeter, and, until he changed his mind, Keynes. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away (these, in turn, are a particular form of wealth tax on bondholders that also falls on non-residents).

There is a surprisingly large amount of experience to draw on, as such levies were widely adopted in Europe after World War I and in Germany and Japan after World War II. Reviewed in Eichengreen (1990), this experience suggests that more notable than any loss of credibility was a simple failure to achieve debt reduction, largely because the delay in introduction gave space for extensive avoidance and capital flight, in turn spurring inflation.

The tax rates needed to bring down public debt to pre-crisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth . (2)

(1) As for instance in Bach (2012). (2) IMF staff calculation using the Eurosystems Household Finance and Consumption Survey (Household Finance and Consumption Network, 2013); unweighted average.

It should probably be obvious that there is one key sentence here, one which explains why the IMF is seriously considering the capital levy (supertax) option, even if it's presented as hypothetical:

The appeal is that such a tax, if it is implemented before avoidance is possible, and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

It all hangs on the IMF's notion - or hope - that it can be implemented by stealth, before people have the chance to put their money somewhere else (and let's assume they're not thinking of digging in backyards, and leave tax havens alone for now). Also, that after the initial blow, people will accept the tax because they are confident it's a one-time only thing. And finally, that a sense of justice will prevail among a population, a substantial part of whom will have little, if anything, left to tax.

It may all sound far-fetched to you now, and most people will still cling on to the idea that "they wouldn't do such a thing". But that the IMF proposes it at all, and so openly, suggests that they might, if only they can figure out how. Not the IMF itself, mind you, they don't collect taxes, but then again they have been involved very intimately with the EU, the ECB and Europe's national governments, in for instance the Cyprus bail-in, which will in all likelihood serve as a blueprint for future "restructurings".

We can't however, discard the possibility that this appears in an October 2013 IMF report precisely BECAUSE it, and its peers in national governments, have found a different way to achieve the same goals. The underlying ideas are clear: most governments have debt levels that can't be rolled over into the future much longer. And inflating them away is not an option: that can't be done without increased consumer spending, and consumers are maxed out. Radical solutions are called for. Not just in Europe either, US government debt will need to be dealt with too.

Two more things: First: if this materializes, the percentage may well be above 10%, and maybe quite a bit; the Boston Consulting Group may not have been that far off 2 years ago with its 30% mark. I mean, who knows? Second: if it happens, a way will be negotiated to include those that seem to escape the hurt at first sight now, those that have nothing left to tax, in the equation. Bet on it. Leaving the poor alone is not what's seen as fair in today's societies.

And one last point, just in case it had slipped your mind. You remember what brought about that surge in government debt between 2007 and today? We bailed out the banks.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2013 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Meremortal
13 Oct 13, 07:50
euro tax

There are a lot of Europeans who have 90-100% of their wealth in real property, their principal residence. How will they tax that? Make them sell? To whom?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History