Cyprus and Taxing Bank Deposits. Could It Happen in America?

March 27, 2013 | By: TaxCure Staff

cyprus bank taxThe recent dramas surrounding Cyprus and its bailout situation are subsiding a little bit. However, the debates over what to do did bring up something new to many: The idea of taxing bank deposits.

To meet requirements to qualify for a bailout from the European Union, Cyprus politicians were encouraged to pass a law allowing for a one-time tax of bank deposits. The measure was referred to as a vote by citizens, and it (unsurprisingly) did not pass.

However, the idea of taxing bank deposits in Cyprus stirred up quite a bit of controversy in the United States. Right now, debates are raging about how to reduce the deficit. Politicians, pundits, and citizens are arguing about how far tax revenue can be raised, as well as what cuts should be made. All of this is happening with a budget sequester in effect.

Many people agree that something has to be done about the current situation. Even with cuts, many agree that some more revenue probably needs to be raised. How far would our government go to balance the budget? Would efforts to raise revenue extend to a tax on bank deposits?

At Least One Congressman Has Thought About It

According to PolitiFact, Pennsylvania Congressman Chaka Fattah (D) has been exploring the possibility of taxing bank transactions since 2004. In that year, he introduced a bill designed to spur the study of the possibility of taxing financial transactions. Even though the measure gained no traction (it didn’t even make it out of committee), Fattah regularly introduced similar legislation.

In 2010, he stopped introducing bills calling for studies, and actually proposed legislation that would result in a transaction fee on payment, including check, cash, credit card, bonds, transfer of stock, and other items. The transaction fee was to be 1%. However, like Fattah’s other bills to similar effect, this one didn’t make it out of committee.

According to Fattah, as reported by PolitiFact, the idea was to help get rid of America’s budget deficit and then eventually use the revenue from the transaction tax to replace the individual income tax. The latest incarnation of Fattah’s bill exempts stock transactions and personal banking transactions from being subject to the 1% transaction fee. But, like his other efforts, the measure is going nowhere.

Taxing Accounts Isn’t Likely to Find Support

Just as the people of Cyprus rejected the idea of taxing bank deposits, it is highly unlikely that the American people would be open to the idea of taxes on their bank deposits – much less all of their financial transactions. The outcry would likely be widespread, and elected representatives might find themselves unpopular with their constituents.

The outcome of the Cyprus vote set a precedent: People still have power in a democracy, and in our representative republic, it’s likely that the people would make their will known to members of the House and the Senate.

What do you think? Would you be willing to pay a 1% tax on certain financial transactions if it meant balancing the budget, plus getting rid of the individual income tax?