The solution to the economic crisis in Cyprus and the rest of the world is not going to come from government taxing the savings of their citizens. The only way for the world to climb out of this financial hole is a grassroots approach. The solution is the exact opposite of what just happened in Cyprus. When individuals are allowed to keep the products of their labor, whether gained through muscles or mind, is when the world will start to heal from the damage done by looting governments.
It is only the saver, the entrepreneur, and the technologist who move our society forward, and rule of law is exactly what allowed these people to come into being. When the saver knows that what he works for and puts into his account will not be stolen by the government, his neighbors or invading hordes, is when his bank account will grow large enough to support new technologies, innovations, products, advancements, companies and jobs. It is because his savings are not robbed that his money will work to benefit all of society. Had the government plundered his savings, there would be no societal advantage other than what can be forcibly accomplished with the crack of a whip at the end of a gun.
If every time Bill Gates saved a buck, the government took it, where would the capital to start Microsoft have come from? If every dollar Thomas Edison worked for was taken by the government for the “betterment of society”, would we still be sitting in the dark? And it is not just about resources going from the private sector to the government, it is about future wealth never being created, because why save something that will be stolen from you? Why, if you live in a bad neighborhood, save money in a jar if that jar is stolen once a month? If the message that government sends is that it is not worthwhile to work hard and save, fewer people will work hard and save.
Why were men finally able to create farms and grow crops? Because the government had a rule of law which was followed, that meant the farmer knew exactly how much of his crop would be given to the government before he grew it, and he knew that with that share of his wealth the government would protect him from foreign and domestic robbers who would otherwise take his harvest. Now imagine the government comes in after the harvest, and says extra crops will be taken that year. The rule of law has been breached, and the incentive to grow more crops than necessary has been crushed. That individual farmer may be fine with what he and his family can save, but now he has nothing to trade with his neighbor, or sell. This means it will be harder for people in the area who are not farmers to get food, because farmers only grow enough for their families, since otherwise the government takes it. Now, because the government ignored the rule of law, the wealth of the farmer and his region has been reduced, not only by the initial amount of food taken by the government, but also by curbing the future supply of food with their actions.
The same incentives exist behind the complicated markets of today’s economy. Cyprus cannot expect to attract investors, savers, or companies after implementing a savings tax, because people will not be guaranteed the fruits of their labor. The situation has greater implications since it was not the Cyprus government acting alone, but in coordination with the EU. This means that if you live in the European Union, you can not be sure that money in a savings account will not be taxed. To some this means moving money and investments out of the EU. To others it may mean investing in physical gold and a strong safe, which would damage the lending capabilities of the banks which used to hold the deposits that have been turned into gold. To many it means abandoning plans to start a new business, to expand a business, or to create new products, innovations and jobs. Why go through the grueling work of building a company, if what you work for could be taken by the government in the blink of an eye?
The rule of law has been breached by implementing a tax on what one has already earned, and already paid taxes on. No one could plan for this surprise tax, and when people were putting money into their accounts, they did not know about this tax. People in the EU can no longer be certain that what is theirs will stay theirs. The one time tax on savings in Cyprus will most likely have terrible economic repercussions for all of the EU, not because of the $7 billion taken in taxes, but because of the precedent set, the uncertainty created, and how people will act with their money in the future.