Eurozone governments facing the threat of bankruptcy should impose a one-off wealth tax on their citizens before seeking help from others, Germany’s Bundesbank proposed on Monday.
The German central bank raised the idea of an emergency capital levy in its monthly report, arguing that it corresponded with the principle of “national responsibility, according to which taxpayers are responsible for their government’s obligations, before the solidarity of other states is called upon”.
The Bundesbank said that the levy would have to be a one-off “imposed in conditions of extraordinary national crisis”, in order to limit negative consequences for investment, and potential capital outflows.
It acknowledged that a nation in crisis would have difficulty making a convincing case to depositors and investors that any such levy would be a one-time measure.
Although the report did not specify a eurozone country that should consider such a tax, its policy makers may have had Italy in mind. At the height of the eurozone crisis in 2011, Rome actively considered such an extraordinary wealth tax – known in Italy as a “patrimoniale” – as a way to pay down its sovereign debt load, the biggest in the single currency after Greece. It was never enacted.
Such an approach could suit Italy because – despite its high sovereign debt levels – its citizens have relatively little private debt and large amounts of wealth. That means a one-off tax could make a major dent in its national borrowing. According to Eurostat, the EU’s statistical agency, Italian households boast higher net financial wealth, as a percentage of gross domestic product, than almost all other eurozone countries, including Germany and France.
The International Monetary Fund discussed the option of a wealth tax in a report in October.
The IMF said: “The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behaviour (and may be seen by some as fair).”
The IMF said the tax rates needed to bring down public debt in eurozone countries to pre-crisis levels would be hefty; it reckoned a rate of about 10 per cent on households with positive net wealth.
Last year, Cypriot deposit holders were forced to take losses on their bank accounts to help pay for the country’s €10bn international bailout. But those deposits were used to limit the price tag for its rescue as opposed to paying down the country’s sovereign debt load.
In 1992, when the Italian lira was at risk of being forced out of the European Rate Mechanism, then-prime minister Giuliano Amato imposed an emergency wealth tax that sucked 0.6 per cent out of all Italian bank accounts overnight to fight ballooning sovereign debt levels.
The Bundesbank report comes amid widespread indignation in Germany, stoked by the popular press, over bailouts of heavily indebted eurozone countries.
A study of household wealth published by the European Central Bank last year gave fresh impetus to Germans’ resentment. The ECB data showed median net wealth in Cyprus stood at €267,000 euros per household compared with €51,000 per household for Germany. Different levels of home ownership played a significant role in the disparity.
In its report, the Bundesbank also noted signs of gradual improvement in the countries most affected by the crisis.
The report said: “Comparing the current situation and trends in the countries concerned with the initial situation at the outbreak of the crisis, it appears that a great deal has already been achieved.” The current challenge for crisis-affected countries is to reduce public and private debt, the central bank said.
“It is of central importance to rapidly reduce public deficits to European target values,” the Bundesbank said.