Fed Opposed Cyprus-Like Bank Tax — in 1941

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Cypriots during a protest against an EU bailout deal outside the parliament in Nicosia on March 18, 2013.

More than half a century ago, the Federal Reserve opposed the idea of a tax on bank deposits similar to the one Cyprus has imposed.

It wasn’t the threat of bank runs that was the problem so much as fairness.

In the Federal Reserve Bulletin of November 1941, the central bank wrote that a bank tax “is not in accord with one of the fundamental principles of taxation in a democracy, namely, that taxes should be imposed in accordance with ability to pay.”

A small-businessperson, for example, might be forced to pay more because of large deposits reflecting the volume of his business rather than his profits, the Fed said. His tax might exceed that of a wealthier individual whose deposits were just salary and dividends.

A deposit tax therefore would be “undesirable” and “not consistent with the principle that the well-to-do should contribute a larger share of their incomes than those in less comfortable circumstances.”

Finally, a “technical consideration” was that some people could probably evade the tax by avoiding depositing money.

The full Fed letter is located on the St. Louis Fed’s archive of research, which preserves and gives access to historical economic and banking policy documents.

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