Cyprus Tax Plan Falls Apart It comes as no surprise that the Parliament of Cyprus on Tuesday voted down a terrible plan to tax insured bank deposits as part of a deal to rescue its failing financial system. The country's leaders and policy makers in Europe will now have to go back to the drawing board. What remains baffling is why Cyprus, European leaders and the International Monetary Fund thought it would be acceptable to tax deposits of less than 100,000 euros, about $130,000, in the first place. Just a few years ago, the European Commission said that countries should fully guarantee deposits up to that amount. By comparison, the U.S. Federal Deposit Insurance Corporation typically guarantees up to $250,000 per individual per bank. It's also not clear who decided to change this eminently sensible policy. Officials in the government of Cyprus have said that they were forced to accept the terms of the bailout by the tough taskmasters who call the shots on Europe's bailout funds - many have read this to mean Germany. But the Eurogroup, which coordinates policy for the 17 countries that use the common currency, says it has always been committed to protecting deposits of up to 100,000. We do have a few behind-the-scenes details. According to unnamed European officials quoted in The Times, Cypriot leaders were adamant that any hit to balances above 100,000 euros be kept at less than 10 percent (they agreed to 9.9 percent last Saturday). This detail suggests that Cypriot leaders were focused on appeasing the Russian oligarchs and pensioners who have stashed billions of dollars on the island, perhaps at the expense of domestic small savers. Regardless, both sides agreed to the deal targeting big and small savers alike. And their misguided attempt to split the pain won them no love in Cyprus or Russia, whose diplomat to the European Union called it "similar to forceful expropriation." Banks in Cyprus have been closed since the end of last week to prevent a run, but they cannot remain closed indefinitely without hurting the local economy. What is clear is that no plan will pass muster with the people of Cyprus if bank balances less than 100,000 euros are taxed. It's unfortunate that it took a mini-panic and protests in the street for that realization to hit home.