A proposed 10% supertax in the Eurozone may do more harm than good to its recovery if it results in capital flight to other parts of the world.
According to a Tax News report titled “IMF proposing 10% supertax bail-in on all Eurozone savings”, the International Monetary Fund (IMF) has suggested a capital levy of 10% on household savings account in Europe.
Theoretically, this would solve the debt problem by bringing the debt ratio to more manageable levels similar to those before the 2008 debt crisis, as well as reduce tax avoidance.
The increased government revenue from the supertax is supposed to mitigate debt levels and normalise fiscal deficit levels. It is also supposed to cause an increase in household consumption as households spend more to avoid the 10% levy.
IMF economists who suggested the supertax said the “radical solution of increase in consumer spending or bail-ins is required” as increasing government debt levels is not an option.
Bail-ins occur when creditors to financial institutions which are in the red bear part of the losses. This means that the financial sector deals with its own problems, instead of pushing the burden to taxpayers, as is what happens during a bail-out when governments offers liquidity to banks in trouble out of state coffers.
However, there exists a very real danger which the economists may have overlooked in their desperate attempt to boost the ailing Eurozone.
Their solution may cause large amounts of capital flight to other parts of the world as Europeans try to park their Euros in investments which accrue better returns.
Other than the usual US Treasury bills and US government bonds, which may not be too attractive now due to their high prices, they may be faced with little choice but to park their money in Asia.
Mr. Satish Bakhda, Chief Operating Officer, Rikvin, said the Eurozone’s recovery is still shaky and may relapse into recession if the slightest wrong move is made.
“Although signs are looking up for the Eurozone as some sectors like manufacturing picks up, it is still very much on a slippery slope and could relapse into a recession if the wrong fiscal or monetary policies are implemented,” he said.