News reports tell us that Europe’s economy has been threatened by “haircuts” to be administered to bank depositors in Cyprus. For more, read “Bank of Cyprus Uninsured Deposit Holders Face 40% Haircut-Central Banker.“
As financial slang used in recent news stories, a haircut often refers to a penalty bondholders, shareholders or depositors pay when bad debts are settled. When a company goes bankrupt, creditors may take, say, a 50 percent haircut, getting back only 50 cents of each dollar they are owed.
In Cyprus, the government planned to seize a percentage of bank deposits to pay for a 10 billion euro bailout of the troubled economy, thus inflicting a haircut on people with money in the bank. (The latest plan affects only a couple of banks, but that just means different styles of haircuts.)
This “haircut” spurred outrage. How can the government just tax — grab — people’s money, which they thought was safe in the bank?
And it threatened the financial structure of the entire European economy. When depositors think the government may steal their money, they may yank their money out of banks, threatening the whole financial system. Check out “3 Ways Cyprus Is a ‘Game Changer’ for Europe.”
Think however of all the tax haircuts ordinary Americans face all the time. Consider the money you have in the bank. You think it’s safe. But what happens to that money when you die? You get a posthumous haircut — if your estate is subject to the inheritance tax, better known as the death tax.
The North Carolina General Assembly is considering repealing this unfair, tax, via HB 101, Repeal Estate Tax.
Doing so would the fair thing to do. Successful people are often assailed for being greedy. (See “Romney, Mitt.”) Yet leaving an inheritance is the most selfless thing anyone can do. It’s absolutely true you can’t take it with you. So a tax seizing some of the wealth you leave to other people is one brutal haircut.
The fears of a Cyprus bank run are another illustration of what the death tax does. The fear is that in Cyprus depositors will take what is left from their deposits and stuff it into their mattresses, where it cannot fund business activities, as bank loans do.
Well, the same thing happens with the death tax. Many North Carolinians trying to avoid this unfair levy do the equivalent of putting their wealth into mattresses — perhaps by buying life insurance, or moving to Florida, which has no such levy — so the tax man won’t snatch it after they shuffle off this mortal coil.
There are many other examples out there of how unfair taxes damage the economy. The death tax is near the top of the list.