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Trajtenberg: More tax breaks for the rich

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this article is a slightly more in-depth version of the op-ed I wrote that was published in the Jerusalem Post.

This past summer, hundreds of thousands of Israelis gathered to protest for social justice; an end to the widening economic gap plaguing Israel’s poor. The demands were simple: cut down on the government corruption and change the monetary policy that work in favor of big business and begin taxing the rich and redistributing wealth. Unfortunately, after months of protesting, the Israeli government on the advice of the Trajtenberg Committee, only marginally changed the tax system, not only failing to address the economic gap with income redistribution or monetary policy, but worsening it by giving disproportionately large tax cuts to the wealthy.

How exactly in the midst of public outcry for reform did the Netanyahu government manage to fit in more tax cuts for the wealthy? The secret was the expansion of a tax loophole using Bituach Leumi, National Insurance. For absolutely no reason, Bituach Leumi, unlike all other programs that are either controlled by the government or sponsored entirely by it, collects its revenue through a separate income tax.

This tax, along with the bureaucracy of Bituach Leumi, has a long history of working against the less fortunate. In particular, Bituach Leumi ignores tax credits and disenfranchises Israelis working more than one job from doing a full tax alignment by demanding that workers do an additional Bituach Leumi alignment and then systematically drowning the workers in confusion, bureaucratic incompetence and paperwork until processing such an alignment becomes economically prohibitive.

Worst of all, Bituach Leumi’s income tax makes Israel’s tax system regressive for the super wealthy, dropping the marginal tax rate for those who earn above a declared ceiling. Previously, the ceiling for Bituach Leumi income tax was NIS 73,422 per month – up to that amount the tax rate was 12 percent, and any income over that amount was not taxed. The Trajtenberg Committee advised dropping that ceiling to NIS 41,850 – in other words, giving a substantial tax cut to both those earning between NIS 41,850 and NIS 73,422 per month and those earning above NIS 73,422 per month. The government approved the measure, which will go into effect next month.

A comparison of the overall income tax rates from 2011 and 2012 shows that Trajtenberg Committee’s reforms ended up not only giving the super wealthy a greater tax break than their less fortunate counterparts in absolute terms, but also in percentage of total income earned.

Consider the charts below of a simple male worker in 2011 and 2012 with 2.25 points.

Notice in the second chart that once a worker makes a bit more than ₪ 40,000, his tax break rises significantly.  That’s the Bituach Leumi ceiling kicking in.

But what about the points?  Certainly all the new points for young fathers should fix this up, right?  Alright, let’s completely disregard women (after all, the Trajtenberg Committee certainly does…) and deal with the case of a father getting 4 extra points for his children.  The graphs would look a bit better:

In this case the less fortunate father would only get a slightly bigger tax cut than his wealthy counterpart.

And this is completely justified; with the price of daycare through the roof and working mothers unable to use their tax credits, helping fathers is a fantastic idea proposed by the Trajtenberg Committee, although an obviously better solution would be to let married couple share points, like they do in the US.

Regardless, giving a few tax credits to the poor does not justify the tremendous tax cuts given to the rich.

The justification for the Trajtenberg committee’s recommendation to cut taxes for the rich is that high income earners were setting up shadow companies to get around paying Bituach Leumi taxes. It was reasoned that by lowering the Bituach Leumi income tax, high earners would be more likely to pay their taxes.

But exploiting one loophole to avoid another is unacceptable, especially when the government can easily close both. The government seems to fear a mass exodus of the rich, which is absurd. No intelligent CEO will just up and leave his job, family and country because he has to pay his taxes, and if he or she does, Israel has more than enough local talent to compensate. This is exactly the kind of corrupt kowtowing to the super wealthy that sparked last summer’s protests.

Israelis need real economic reform that rolls back some of the supply side policies and takes a fresh look at what is supposed to be a progressive tax system. Bituach Leumi should be incorporated into regular income taxes, laws that enable tax loopholes need to be closed and points should be awarded not only based on the individual worker, but also on his or her respective family unit. One we take these preliminary steps, perhaps the Israeli government will finally be able to legislate kind of reform that was promised this past summer.


8 Comments

  1. Reuven says:

    I’ve gotta say that I typically like your stuff, but disagree here.

    First off, to the best of my understanding, Bituach Leumi is a fixed amt per person per month, with little change based on s/o’s salary history. (This is unlike the Social Security program in the US, where the payment does increase with higher salaries, but not nearly in proportion). Therefore, the ‘rich’ who need to pay tax on their whole salary are paying far in excess than their expected liability, and are simply subsidizing e/o else. That’s why Bituach Leumi is not an ‘old-age insurance’ programs, but is simply another wealth transfer from rich to poor. This change simply reduces some of that transfer, but trust me, the ‘rich’ are still paying beyond their fair share for this program.

    With regards to women, they currently have it much better off than men in workplace law. This includes receiving extra points for being female, points for all kids till 18, ability to leave early to tend to kids (in many workplaces), maternity leave, and typically not having to pay any income taxes (due to tax laws) until their salary reaches approx 10k (this is from an analysis I read during the whole tax debate, but I never did verify it).

    I would be interested if s/o calculated the numbers here to see what percent of the taxes the richest x% of the population pay, and how that compares to their proportion of all income. I think that would make it clearer whether the rich are being let off easy of not.

    In addition, you ignored from your analysis the increase in capital gains tax, which would typically have a larger effect on the wealthy. You also shouldn’t forget the proposed tax in the works on either luxery items, or the 2% surtax on very high incomes.

    I do strongly agree with your comment about being able to pool together benefits on a family basis.

    • jonnydegani says:

      Hi Reuven. Good to hear from you. You make a lot of important points. Let me try to discuss them one by one

      You are correct, Bituach Leumi is based on the salary of the month and not the history. There is no reason for this; it should be just like any other tax. If you look at the two income taxes together, which combine to form our tax system, then you’ll see that we have a tax system that gets progressive and then regressive; this doesn’t make sense (I believe what you consider a “wealth transfer from the rich to poor” is what i call a progressive tax system – which it is, until it gets regressive again). My point is that there was no point in using the Bituach Leumi ceiling to make a tax break for the rich, especially considering the protests that necessitated these reforms in the first place.

      Women were not the main topic here, but I’ll take on this one as well. Women get tax breaks which have them not paying taxes until about NIS 5,700, and this numbers goes up when there are children (I did the analysis myself). Unfortunately, the Israeli government has tons of loopholes in its employment law that allow employers to not pay any benefits; women and minorities suffer from this the most. The new reforms completely ignored real women’s issues and went for the issues of getting points by giving them to their husbands.

      I don’t think the issue is whether the rich pay enough or not; the issue is whether the government ignored what they were supposed to do by giving disproportionately large tax breaks to the rich. Israel has a very high GDP per capita, but is one of the worst countries in the OECD with regard to income disparity. The government was supposed to address this, not make it worse.

      It’s funny you bring up the capital gains tax issue. I originally included it and then pulled it because it went a bit off topic. I think that the gain was a good idea, although I see no reason why capital gains should not be taxed progressively.

      • Reuven says:

        Jonathan,

        Good chatting with you again, and thanks for the reply.

        I’ll try to return to some of the points later, but with regards to the capital gains, I’m sure you understand that it is simply a form of double-taxation. I receive capital gains b/c I am a part-owner of a company (through owing shares in it for example). Their profits are taxed at x%, and what remains should be the owner’s share only. However, if the goverment then taxes the owner’s on their portion as well, then the profits of the company have been double taxed.

        I do fully support eliminating as many tax loopholes as possible, as they simply distort the tax system.

        With regards to Bituach Leumi, it’s sold to the public as a pension plan, hence e/o contibuting towards their pension. If it were sold as another welfare scheme, public support would decrease. If the government were being truly honest, they should just include it inside the income tax, and treat the payments as they would s/t like unemployment benefits. They won’t though since ppl would complain about their income tax being so high, even though there is no practical change to their take-home pay.

        Also, can you contact me by email. I need to ask you a question.

      • jonnydegani says:

        I keep going back and forth in my head on the capital gains issue. In theory, investing should be like buying a selling something and the tax should be like VAT (at least when selling a stock), but in practice investing is a regular form of income and you have Warren Buffet telling us how it makes him pay the same percentage in taxes as his maid. That is why I’d like to see some sort of progressive compromise. In Canada, for example, Capital gains is taxed at half the marginal rate. I’d say here we should offer half the marginal rate + 8% (half of VAT). I am not 100% certain about about this though…

  2. erikaben says:

    I don’t completely understand the incomprehensible system in this country and even if I did, it’s obvious there’s nothing I can do about it. Nevertheless, I will study your article and comments so I can learn more (about how I am being screwed on a daily basis).

    What I do know on a general level is that after months of protesting, the Israeli public got a huge slap in the face: higher arnona, gas and electricity, and as you note, more tax breaks for the rich.

    To me, it’s obvious we must continue protesting and I hope to see a renewed surge once better weather rolls in.

  3. Seth says:

    After making the emotional decision to make Aliyah with my wife, we ended up staying in the United States because of how much harder it would have been to continue to run our business profitably in the hostile anti-business corporate tax environment that exists in Israel.

    The problem is that people are not treated equally in Israel with all of the deductions/loopholes that exist and the insane jumps that the progressive income tax make. Yes, Israel is great for starting a business, as long as that business is in the right field and spends its money how Israel likes. The same people asking for more this and that from the government are also demanding jobs, yet the policies they demand drive the real job creators out.

    Israelis have to ask themselves, would they rather work for a living or get it handed to them by the government on the governments own terms?

    • jonnydegani says:

      Hi Seth,
      I think you may be mistaking corporate and personal taxes. The corporate tax rate in Israel is less than in the United States. The corporate tax rate in Israel is 24%; in the US it is 0% – 38% (progressive) for federal corporate taxes and an additional 0% – 12% for corporate state taxes. If you are self employed, you should be aware that there are agencies such as עצמאי שכיר which can help you get around the double taxation issue.

      As you write, the loopholes in Israel are insane. Unfortunately Israel, like the US, is enforcing a policy of helping mostly the very rich, helping very poor only slightly, and all the while crushing the middle class. What is being called a free market policy in Israel is really mercantilism, playing favorites with government contracts and tax loopholes in order to favor only a handful of government-connected corporations.

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