The Cyprus ‘bank robbery’ has been hailed as both a novel and notorious proposal to bail out a floundering European economy. However, as the spotlight stays focused on the particularly small vote in Cyprus’ parliament, there was quite a bit of business that slipped under the radar around the world while the media was busy. Specifically, a report has come out stating that Spain has now actually amended its constitution to allow it to tax amounts sitting inside personal bank accounts.
It would seem as though Spain has managed to vote through the policy that Cyprus shut down by simply changing the phrasing of the endeavor, and justifying it as a tax-collection act rather than a bail-out policy. That being said, as this new precedent takes hold of the EU, it is interesting to notice how it is that the ability of countries like Spain to take advantage of deposit accounts to refund its over-leveraged financial system will impact its ability to bounce back.
In evaluating the impact of the Spanish bank-levy amendment, it is important to start off by defining the terms of the policy. Specifically, the change made it so that governments could be allows to directly tax the deposit accounts of personal savers that are in regions that have made very little to collect or pay federal taxes at all. This amendment is then simply in place to allow the government to get aggressive to tax avoidance issues within its own jurisdiction, and is to be implemented to ensure that effective tax rates are standardized across the country, albeit forcefully.
That being said, the proposed amounts to be paid by each region have yet to be fully disclosed, but would only impact communities that are considered to be autonomous under Spanish law, but still need to comply independently with federal taxation requirements. Given the state of the Spanish situation, this sort of mechanism starts to seem almost reasonable as compared to a blanket tax on bank accounts in a country that acts a major global financial intermediary. However, there are a few issues with the policy that come into perspective given the contexts of the Spanish situation.
The first issue with the Spanish deposit levy is that it ignores the way in which many Spanish savers have already actually paid into the financial deficit of the banking system, albeit somewhat inadvertently. Over the last decade, savers were actually encouraged to position amounts of their money into preferred shares with the banks they were saving in, so that they could earn a higher return on their savings. From there, the banks could use the funds as injected capital to either clean up their financial positions, or in other cases, take on incremental risk.
The end result was a situation where the decline of these banks today has resulted in a situation where the personal savers of Spain have already paid into the downfall of their own financial system, similarly to how it is that the proceeds of this tax would go into correcting the shortfall. This also means that many of the ‘savings accounts’ in Spain would not actually be eligible for this sort of tax, because the funds in question are actually invested into preferred shares with the bank, and are therefore not eligible for the levy.
The second issue associated with a levy placed on Spanish deposit accounts in ‘autonomous’ regions that are likely in arrears on their payments is that there is no real mechanism in place to actually force the payment of these taxes. While the governments have legalized the actions that they would take to place a levy on bank deposit accounts, there’s nothing really in place to force the autonomous regions to comply (in terms of detriment at least).
As such, a bank in one of these regions may simply refuse to comply with the request, advise the individual in question to refuse to comply, or come up with an investment vehicle that helps the client to continue avoiding the tax implications of the change all together. The end result is that the government would still need to enter costly litigation with both the banks and the savers to actually collect on the funds, despite having the regulation in place. Essentially, this means that the government would likely need cooperation from the financial institutions in question to actually pursue ‘missing tax payments’, given the nature of this change to date.
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