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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Cyprus & Cruel Tax

Posted by Muthu on March 19, 2013

I’m trying to see if I can write smaller pieces and little more frequently. This piece is an experiment. Please do share your feedback.

I did not remember a country by name Cyprus till it was in news few days ago for all wrong reasons. It has been in economic mess like few other European countries. European Union (EU) as a part of bail out package, has asked Cyprus to levy tax on bank deposits. This innocent sounding word was nothing but a bank robbery by the government and EU on Cyprus bank account holders.

Unilaterally it was decided that people having up to 100,000 euros as deposits would be deducted 6.75% as bail out money and for deposits more than 100,000 euros, the deduction would be at 9.9%.

To understand better, let us assume you are having a deposit of Rs.10 lakhs in SBI. If government of India takes Rs.1 lakh (10%) away from you stating that it is to help the country, how will you react? There would be rage and run on banks. Protection of private property is very important for a civilization and democracy to function effectively.

If you think it as one off case, it isn’t. During great depression, in 1933, U.S. government banned private holding of gold. People were ordered to handover the gold they have and were provided instead with dollars of equivalent value. Once the process was over, the government devalued the currency by over 40% eroding people’s wealth overnight. This coupled with high inflation was an extremely tough time for its citizens. This shows even a democratic government is capable for robbing our wealth over night.

This ban was subsequently lifted only in 1975 and Americans were again allowed to own gold. So for 42 years owning gold was illegal in US though owning a gun wasn’t:-) 

Till last decade, owning gold was severely punishable offence in China. For the last few years, people are encouraged to buy gold. China being China, we have to wait and see how the future pans out. 

The above are direct robberies or penalties. There is another way which almost all government resort to. Till 2007, the saving interest rate in US was above 5%. After the sub prime crisis, Federal Reserve (similar to our RBI) kept the rates at 0%. Yes, you read it right, zero percentage. The rates are expected to remain same until 2014. 

When the interest rates are zero, bank does not pay anything to depositors. Banks still earn interest from its borrowers. Not paying interest which may run into billions or trillions of dollars is nothing but levying tax on depositors indirectly. The 5% fore gone is the tax paid by people for bailing out banks. Not only that, through this policy, huge wealth is transferred from people to banks. 

When the interest rate is lesser than inflation, the saver always loose. If we take into account taxes, it is a completely loosers’ game. Even in India, the interest rates for savers are below consumer price inflation. This means, savers are forced to loose and their wealth eroded due to lower rates. Media and businessmen always say that lower rate is good for the business and economy. Partly true but cheap money also punish savers and create asset bubbles. 

I would like to finish with what Buffett say on this subject. 

“It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation or pay no income taxes during years of 5% inflation. Either way she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous, a 100% income tax but doesn’t seem to notice that 5% inflation is economic equivalent.”

4 Responses to “Cyprus & Cruel Tax”

  1. Shashank said

    Nice observation by drawing analogies to present the complete picture. Effort of writing in small pieces is a nice step towards sharing your views on news. Hoping for such nice explanatory pieces in future too.

  2. Ashfaq said

    Writing in small pieces and often is a good idea! Thank you Muttu for educating us. May you prosper and take us along 🙂

  3. satish said

    Small is fine, but please write frequently for all your blog followers. You have lot of wisdom

  4. Milind said

    Good Decision Mutthu ..To write short and more IMPOTANTLY TO Write FREQUENT.Lot of our regular readers check our ABlog everyday for we dont know when would we get article from your side.Happy Frequent writing

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