Taxing Bank Deposits

In the current economic climate of grossly indebted governments and faltering economies, it is imperative that policy for the medium to long-term should focus on wealth-creation, major reductions in government expenditure and a structure of incentives for entrepreneurship, production and savings. Tax reductions have a crucial role as incentives and capital accumulation and savings support investment. The federal government has taken a bold step along these lines in encouraging investment and innovation by small businesses through concessions and tax reduction.

It therefore beggars belief that the government should now be considering imposing a tax on bank deposits. Rather than encouraging enterprise and production by tax reduction, it now proposes to take more money out of the private sector instead of reducing its own expenditures. This will be done by punishing those who save the capital that may be applied to private investment and production – savers whose interest earned on their savings is already taxed to the point of exploitation.

Current monetary policy entails low interest rates for prudent savers, on the one hand and, on the other, encourages the search for higher savings to combat this low rate of return and a degree of inflation that further reduces returns. Savers have therefore turned to the stock market in search of better returns, but at high risk. That high risk has now eventuated and billions of dollars are being lost.

To overfill the cup of dismay, those who have rescued a fraction of their investment from the stock market face the prospect of another smack in the eye if they put their remnants into a bank account.

The proposal to tax bank savings, therefore, is not only bad economic policy it is also bad social policy, and, at the margin, will make some victims candidates for welfare support.

It is said that the government’s back-benchers are challenging the proposal. Good luck to them!