Bjarnason says taxes on deposits amount to confiscation

Vilhjálmur Bjarnason argues in an opinion piece published by Morgunblaðið that Iceland’s taxation of bank deposits and inflation adjustments amounts to confiscation.

He opens with a story about a bank robber who, asked why he robbed a bank, replies: “There’s money in banks.” Bjarnason compares the simplicity of that answer with the question of why young girls become pregnant.

He also recalls the singer-songwriter Megas trying to get paid for performing at a bank’s annual party. Although the bank had money, it would pay his invoice only into his bank account. Megas did not have an account and kept his money in his trouser pockets, Bjarnason writes.

Today, he argues, the best way to rob a bank is to own one. Another way is to find ways to take money from customers. He describes taxation as the legislature’s method of collecting money from banks.

Deposits are a common source of funds for lending, and Bjarnason says demand for loans often exceeds financial institutions’ lending capacity because of a shortage of available funds. He argues that, while other financial markets try to curb excessive borrowing by taxing debt, Iceland instead encourages borrowing through measures such as interest subsidies.

Interest earned on deposits is taxed, as are inflation adjustments, known in Icelandic as verðbætur. Bjarnason calls the tax on these adjustments expropriation and argues that it breaches the Constitution’s protections against expropriation. He says the government has placed the charge in the Income Tax Act, while few people challenge it.

He says older people and children hold bank deposits, while others use them to cover expenses between paydays and meet basic security needs. He adds that depositors receive no compensation for the loss of value of cash caused by inflation.

Bjarnason also points to indirect charges on deposits. He says a tax on financial institutions’ liabilities is effectively paid by depositors and by holders of bonds issued by financial institutions, including pension funds. He puts the current tax at 0.146%.

He says a liberal government, despite the Party’s opposition to additional levies, temporarily increased the tax by 0.376% to fund what he calls giveaways. One member of parliament voted against it, arguing that bank customers would pay the cost. Bjarnason says the tax was temporary.