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.