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Tuesday, 19 March 2013

Don’t tread on us! Cyprus vs. the flat-tax

Who would have thought about that? The tiny little island of Cyprus defends itself against the mighty EU – especially against a vain and useless attempt to bring the country out of its monetary crisis by obviously picking the wrong strategy.

After the announcement of the most recent bailout plan, the Cyprus government and the top EU decision makers have come up with a plan to rescue Cyprus: by burdening every single citizen and bank account keeper in the country. The bailout plan outlined a mandatory one-time tax of 6.75% of everyone’s savings below 100,000 Euros, and 9.9% for everyone owning more than 100,000 Euros. As a result, the Cypriot rage was enormous, and many are desperately trying to withdraw all their savings from the bank – an image that seemed to have been banned to the history books.

However, the Cypriot parliament opposed the plan, not a single Member of Parliament agreed on the plan during the vote last Tuesday, leading to a failure of the entire EU austerity bailout plan for Cyprus. In short, Cyprus will either have to face imminent bankruptcy, or renegotiate the whole portfolio all over again.

The idea of collective expropriation
It is a unique step in the current development of the Euro crisis, something that has neither been done with Greece, nor with Spain, Italy or Portugal. So far, any bailout and austerity plan did not include a direct monetary contribution of the country’s citizen into the bailout plan through the people’s savings, even though austerity steps involved painful cuts for all citizens.

Even though there were two levels of payments – depending on the amount of saved money – 6.75% is a lot, especially for those who have little or almost nothing, and this is the vast majority of the Cypriot population. For the big earners of investors, their 9.9% share to the bailout plan nearly looks negligible. Most likely, the Cypriot government, the EU and the IMF wanted to charge the main amount of the big investors, especially those who use Cyprus as a tax haven.

The new proposal to be presented to the European Council and to the Cypriot parliament suggested and adaption of the savings limit, so that low income or low savings won’t be affected by the “flat-tax”. That again raises another problem: if even the high savers get inadequately taxed, then the rescue attempts for Cyprus remain insufficient, or foreign investors pull back and withdraw necessary assets to keep the Cypriot economy alive.

Open the flood gates!
The biggest threat however is, that even the mere idea of a mandatory one-time tax payment by all citizens can open the flood gates to all the other crisis states in Europe. Out of a sudden, everyone will have to pay directly for a bailout, no matter if low or high income, no matter if he’s an unemployed Cypriot or a hyper rich foreign investor.

Even though the Cypriot government , the EU and the IMF make the decisive U-turn and prevent a full scale flat tax on all savings, it does not mean that the idea will be banned for ever. In the view of the crisis, it might be an attractive solution for the other crisis states – not necessarily for the lower savings, but for foreign investors who seek a relatively safe tax haven.

But even for high tax countries like France or Germany, this one-off levy might be used as a last resort instrument in the event of an imminent monetary collapse. The results, however, will be exactly the same as it happened in Cyprus in the past few days: heavy cash withdrawals by desperate citizens, trying to rescue their money from a system that has turned into a self-destructive monstrosity, no longer serving the citizens but ruining the foundations of social stability instead.

When greed wins
It is apparent that the banks have caused a crisis which is turning into a dangerous vicious circle, with ruinous consequences not only for a nation’s GDP but also for fiscal security of each of its citizens. Paying a big chunk of your own money in an emergency is painful, but reasonable if you can protect yourself from further harm. This flat-tax, however, will not prevent any further damage to you or your country, and you are in essence paying for something you were never able to take influence on or which will not even remotely improve your own economic situation. As a consequence, you not only lose faith and trust in the own economy, but above all in your own country.

The Parliament’s very recent rejection of the plan is also unique in the view of the entire Euro-Crisis, it’s the first time that a crisis state refuses to follow the austerity requirements implied by the EU and the own government. In fact, the Cypriot leaders have listened to the roar and the anger of the people. This might also be a wake-up call for all the other countries in crisis, a message that a people is no longer willing to accept drastic and unreasonable manners in order to balance the national budget, or simply to rescue some highly indebted banks.

More losers than winners
At least, the decision by the Cypriot parliament has completely changed the situation and the whole bailout plan has to be redrafted. But still, the idea has been provided, and it is only a matter of time until it comes back again.

The losers are already visible: every citizen is going to pay, and especially the low earners will have to bear the highest burden. That’s the case in Greece, in Spain, in Portugal, in Italy, and now in Cyprus. But the list is not finished yet.

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