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Are Political Elites Planning a One-off Wealth Tax?

David HumeNovember 15, 2014 | by Steve McCurdy

David Hume was a Scottish philosopher and economist who lived in the middle 1700s. The Founding Fathers, particularly James Madison, were strongly influenced by Hume’s writings. Among Hume’s many gems is this one:

“Either the State ends public debt, or public debt will end the State.”

 

We Should Expect a Spike in Financial Repression
 

Trillions of dollars of quantitative easing have not solved the global debt problem, but have only exacerbated it by increasing public debt to unprecedented levels throughout most of the world. As the political leaders of hopelessly indebted democracies increasingly understand the wisdom of Hume’s warning, we should expect a dramatic increase in financial repression. It is not possible for governments to tax their way out of their debt problems using conventional methods, and we have warned here and here of the capital controls that are surely coming.

Capital Controls Already Implemented

 
In our article “Government is Coming – Watch Your Back,” we described what we calledFATCA “stealth capital controls” which have already quietly been imposed on us. These included FATCA, described by the government as legislation to fight tax fraud but really designed to prevent capital flight, and “Exit Fees” on bond redemptions, which are imposed to prevent a potential run on the bond market when interest rates rise.
 
In Poland, an even more radical measure has been adopted. When the country’s debt-to-GDP ratio crosses the 55% threshold, capital controls are automatically implemented, one of which is the “expropriation of private pension funds.”  By “expropriating” (a soft euphemism for “stealing”) the AXA, ING, and Generali pension funds, Poland lowered its debt-to-GDP ratio by 8 percent.
 
As onerous as these actions are, they do not begin to solve the global debt problem. To put the debt in perspective, the current national debt of the United States is approaching $18 trillion, with $10 trillion of that added just since 2004. Average, annual, US income tax revenues for the last five years are $2.5 trillion. That means that the amount of money required just to reduce the national debt to its 2004 level is equal to about $10 trillion, or about four normal years of tax collections.

The “Big One” That is Coming

 
Capital ControlsThere are really only two possible sources for the massive amount of money necessary to save the system. One is the nationalization (or “expropriation) of all private pension and retirement funds, and the other is a “one-off” levy on private wealth (a “wealth” tax.)
 
Because the preservation of power is the instinct that overwhelms all others for politicians, the political elites will choose the method the causes the least political damage, and we believe that is clearly the wealth tax.
 
The International Monetary Fund (IMF), is a global financial institution that has recently been increasing its power and influence in the global monetary system, primarily because it is the only central bank that still has low leverage and liquidity. From the time it was organized in 1945, the IMF always maintained an official position against capital controls of any kind. That is, until it recently changed that position in an IMF publication:

“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. 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 actually be seen by some as fair.”
 

Capital Controls in Cyprus
Capital Controls in Cyprus During the Bail In

Shortly after this publication became public, Germany’s Bundesbank jumped on the bandwagon with its own affirming pronouncement:

“With this special context in mind, the following outlines the various aspects of a one-off levy on domestic private net wealth. In other words, a levy on assets after liabilities have been deducted. From a macroeconomic perspective, a capital levy – and even more so a permanent tax on wealth – is, in principle, beset with considerable problems, and the necessary administrative outlay involved as well as the associated risks for an economy’s growth path are high. In the exceptional situation of a looming sovereign default, however, a one-off levy could prove more favorable than the other available alternatives, …If the levy is referenced to wealth accumulated in the past and it is believed that it will never be repeated again, it is difficult for taxpayers to evade it in the short term, and its detrimental impact on employment and saving incentives will be limited – unlike that of a permanent tax on wealth.”

These excerpts make some important things clear to us. First, they make it obvious that theCapital Flight subject of a one off-tax is definitely on the table and is being actively discussed among the central banks and political leaders.

Second, from the passages that we have highlighted in bold type, it is clear that we will be given no advance warning, because advance warning would provide time for nimble and “internationalized” citizen-taxpayers to figure out how to minimize or avoid the tax. Our guess is that severe restrictions on bank withdrawals will be in put in effect between the time the one-off tax is announced and the time it is paid.
 
The fact that these statements have been published at all tells us that these discussion have likely progressed much further than we might have thought, and we suspect the statements were released as a “trial balloon” to test the initial reaction of private citizens to the concept.
 
Our advice is the same as always – keep as little cash as possible in domestic banks, and close all accounts that are a matter of public record, such as pension, IRAs, and public retirement accounts. Keep as much of your wealth private as you possibly can, because your government wants it.

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