For pity’s sake don’t give Osborne any ideas!

Here’s a scenario for you

You wake up tomorrow morning. On the radio you hear that the government has said that all the banks are bust. Everyone is going to have to sacrifice 10% of their savings to bail the system out. It’s the only solution. Now, you’ve only got £60,000 in the bank. You know up to £85,000 is insured under the nation’s deposit protection scheme. So you think you’re covered.

Not so. Turns out the 10% fee is a tax. A ‘wealth’ tax, if you like. So you lose £6,000 of your savings anyway, even although you thought you were playing by the rules

Sound unfair? I’m sure the residents of Cyprus would agree with you. Because that’s exactly what happened to them this weekend……

How Cyprus may end up robbing its savers

The banking system in Cyprus is about eight times the size of the country’s economy. Due to its exposure to Greece and its “own burst property bubble,” it’s bust. Meanwhile, the European Central Bank is threatening to cut off emergency funding to the banking system if some sort of bail-out deal couldn’t be sorted out

In all, Cyprus needed around €17bn – 100% of GDP – to save the banking system and pay its own bills. It’s not that much money by euro standards. The trouble is, any bail-out loan would just have boosted the nation’s debt-to-GDP to ridiculous levels. They’d never have been able to repay it. Eventually, its government debt would have needed to be restructured

The northern ‘creditor’ countries (Germany and Finland in particular) have already been caught out on that front by Greece. They’re not keen to let it happen again. Not in a German election year. So Germany and Finland said that Cyprus had to find more money from somewhere to reduce the loan needed, from €17bn to €10bn

Making government bondholders take a ‘haircut’ would have scared every other bond holder in the eurozone. It also wouldn’t have helped much, because banks hold a lot of the debt

So it had to be the savers. That’s drastic enough – so far depositors have been protected in this crisis. But even more radically, the tax applies to everyone. So the €100,000 eurozone protection scheme counts for nothing. The argument is it’s a tax. It’s not that the bank has gone bust. So the protection isn’t relevant

If you hold less than €100,000, you’ll be charged 6.75%. If you’re over that limit, it’ll be 9.9%. Whichever way we look at it it seems to NMTBP to be a type of legalised robbery

Now, the deal isn’t done yet. The Cypriot government has postponed a vote on the topic. It looks as though they might try to punish small savers a bit less by changing the split from 6.75% and 9.9%, to 3.5% and 12.5%. And they’re also talking about giving people who keep their money in the banks some form of potential future compensation, in the form of bank shares, or future revenues from natural gas production

But the point is: a precedent has been set. Depositors are fair game, regardless of how often the rest of Europe insists this is a ‘one-off’. And that’s a major worry, especially with George Osborne running out of ideas on how to cut the deficit, and the budget just around the corner……

The lessons from Cyprus

Assuming you don’t have any money in Cyprus (Cypriot banks in the UK aren’t subject to the tax), you won’t be directly affected by this. But there are two key lessons to take away:

Firstly, when you deposit money in a bank, you’re making a loan to that bank. ‘Savers’ are a much-derided group of people at the moment, more often painted as degenerate selfish ‘hoarders’ than as the vital sources of capital they actually are. And banks often act as if they’re doing you a favour by deigning to look after your money

But the fact is, you’re providing funds for the bank. And just as you would with any other person who asks you to borrow money, you need to consider both the terms on offer (such as the interest rate available), and the borrower’s creditworthiness

The second point is that governments can do what they like. They will lie point blank. They will make stupid decisions. You cannot expect them to look after your best interests if this conflicts with their own

Think it can’t happen here?

It’s admittedly unlikely, but there have been some unbelievable taxes levied right here in the UK in the past. Here are 5 crackers:

Card Tax

The card tax is a great example of people being taxed for something which is popular and pleasurable. At the time of the institution of the tax, playing cards was extremely popular after dinner (no doubt due to the lack of televisions and playstations) so the King saw an opportunity to fleece his people. The tax, along with the fancy design and manufacturer’s logo commonly displayed on the Ace of Spades began under the reign of James I, who passed a law requiring an insignia on that card as proof of payment of a tax on local manufacture of cards. Until August 4, 1960, decks of playing cards printed and sold in the United Kingdom were liable for taxable duty, and the Ace of Spades carried an indication of the name of the printer and the fact that taxation had been paid on the cards

Hat Tax

The hat tax was a tax levied by the government from 1784 to 1811 on men’s hats. The tax was introduced during the first ministry of Pitt the Younger, and was designed to be a simple way of raising revenue for the government in a rough accordance with each person’s relative wealth. It was supposed that the rich would have a large number of expensive hats, whereas the poor might have one cheap hat, or none at all. The hat tax required hat retailers to buy a license, and to display the sign Dealer in Hats by Retail. The cost of the retail license was two pounds for London and five shillings elsewhere. Heavy fines were given to anyone, milliner or hat wearer, who failed to pay the hat tax. However, the death penalty was reserved for forgers of hat-tax revenue stamps

Window Tax

The window tax was a significant social, cultural and architectural force in the UK during the 17th and 18th centuries. Some houses from the period can be seen to have bricked-up window-spaces (ready to be glazed at a later date), as a result of the tax. The tax was introduced under the Act of Making Good the Deficiency of the Clipped Money, in 1696, under King William III, and was designed to impose tax relative to the prosperity of the taxpayer, but without the controversy that then surrounded the idea of income tax. When the window tax was introduced, it consisted of two parts: a flat-rate house tax of 2 shillings per house and a variable tax for the number of windows above ten windows. The richest families in the kingdoms used this tax to set themselves apart from the merely rich. They would commission a country home or a manor house whose architecture would make the maximum possible use of windows. In extreme cases they would have windows built over structural walls. It was an exercise in ostentation, spurred by the window tax. Amazingly, the tax was not repealed until 1851

Beard Tax

In 1535, Henry VIII, who wore a beard himself, introduced a tax on beards. The tax was a graduated tax, varying with the wearer’s social position. His daughter, Elizabeth I, reintroduced the beard tax, taxing every beard of more than two weeks’ growth. The tax also appeared in Russia but for a different reason: to make the people shave as the Tsar considered beards to be uncultured. In 1705, Tsar Peter I instituted a beard tax. Those who paid the tax were required to carry a “beard token”. This was a copper or silver token with a Russian Eagle on one side and on the other, the lower part of a face with nose, mouth, whiskers, and beard. It was inscribed with two phrases: “the beard tax has been taken” and “the beard is a superfluous burden”

Cowardice Tax

The cowardice tax (properly known as scutage) was a special tax levied against people who chose not to fight for the King (not just for reasons of cowardice). The institution existed under Henry I (reigned 1100–1135) and was initially relatively cheap, but then King John raised it by 300% and started charging it to all knights in years in which there were no wars. This is partly what led to the Magna Carta. The tax lasted for around 300 years and was eventually replaced by other methods of fund-raising from the military

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