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contract workers: justice for some is not justice for all (from the Times of Israel)

A few months ago, the Israeli public finally began discussing the issue on contract workers and what it means to work without any social terms or benefits. Weeks of debates culminated in a four day general strike bringing the issue to the forefront of Israeli media with MKs, businessmen, and labor activists talking about the moral, legal and ethical issues of contract work. But what should have been a platform for change culminated in an agreement for only Histadrut workers, leaving the overwhelming majority of Israel’s struggling working class to suffer.

I’d like to begin by explaining what constitutes a contract worker, because most of the media as well the Israeli government seem to have no idea. A contract worker is any worker, whether part time or full time, who works under a contract that circumvents Israeli labor law. Some of these workers receive wages below minimum wage, many do not receive a pension, and nearly all of them are missing out on at least one of their legal rights, including but not limited to reimbursement of transportation, vacation, sick leave and overtime pay.

There is a reason that we have labor laws. Elected officials enact labor laws on behalf of their constituents as a counterweight to a firm’s desire for strict gains. While it may not be desirable for an individual firm to give vacation days or a sick leave policy, we, the citizens of Israel have the right to enact such laws via our representative government and tell firms that if they want to do business in Israel, these are the rules.

Other labor laws serve not only to help workers in the short run, but also to help stabilize the economy in the long run. For example, the mandatory pension law is designed not only to ensure that all Israelis will be able to retire with dignity, but also to enable the government to ultimately cede the task of supporting the poor, a task that it currently does both begrudgingly and inadequately, to the individual workers. By undermining Israel’s labor laws and allowing employees to pay workers without putting money into their pension funds, Israelis risk not only the continued suffering of the elderly, but also the continued collective economic burden that payouts incur.

Finally, allowing employers to write contracts that circumvent Israeli law leads to lazy governance. For example, most people agree that Israel’s overtime policy, where overtime is paid based on hours worked per day, is excessive and unrealistic, as most jobs require and reciprocate with flexibility. A realistic alternative would be to change the law to mirror the labor laws of other countries, where overtime is paid for excessive hours worked per week or month. But since employers usually sign workers onto a contract for a “global salary,” meaning no overtime whatsoever, the matter never came before the Knesset and they never bothered changing the law. Consequently, instead of having a reasonable overtime policy, most Israelis receive no overtime pay at all.

Much of the media as well as the government claim that by turning contract workers into salaried workers, employers would lose the flexibility they need in order to hire additional labor for seasonal projects, end up giving tenure to more useless workers, and ultimately cost employers too much. In truth, this argument only applies to workers in companies with strong unions, such as the histadrut. For all other Israelis, Israel’s policy for firing a worker is not very strict at all, one day of notice per month with a max of a month’s notice. But if employers insist that following the law is too complicated, then at least some sort of compensation should exist.

To begin, all workers, contract and otherwise, should have a pension paid out of their salary. The pension law isn’t just about the worker; it’s about Isael’s economic stability and in an age of electronic transfers there is no reason why this cannot easily be done. Second, if an employer does not want to pay his employees benefits, then the government should establish a set percentage to be paid as compensation for vacation days and a sick policy. Finally, in order to make sure that all employees follow the laws mentioned above, it should be mandated that all wages should be stated to the potential employee excluding the additional pay for benefits. Just as a regular job quotes its salary figures in gross salary not including benefits, so too salaried workers should have their pay offered in terms of gross pay without benefits. This would also end the current situation where employers pay benefits as a part of a minimum wage, effectively paying their workers below minimum wage. This would also allow potential workers to see the payoff of a job in a consistent, understandable way so that the worker can know if the job is really worthwhile.

Allowing businesses to circumvent labors laws is not only immoral, but make every discussion about labor laws entirely irrelevant. If our Knesset members really believe that minimum wage is just an idea, that the pension law is only an option and that social terms are just a proposal, then they should say so. But if they believe that our labor laws aren’t just a suggestion, but the product of our representative democracy, then the only just thing is to tackle the problem of contract workers and bring order to a labor market plagued with anarchy.

Import duties and the Israeli Laffer curve

If you’re like most Americans, you tell your relatives who send you packages not to declare that anything is new or has a value over $5.  You do this because one time a relative sent you something and the post office held it hostage until you paid some sort of ridiculously large tax/fine/payment that is calculated using what I can only assume is some sort of mixture between random numbers and witchcraft.  Well, a tiny bit of that is about to change.

As of January 30th, Yuval Steinitz signed a reformation of two import taxes.

– No import taxes on anything ordered by the internet up to ₪ 1,200, although you’ll still have to pay 16% for VAT.

– No taxes (even VAT) on personal packages valued at $75 (up from $50).

The first reform is a great piece of legislation that decreases the cost of alternatives and fosters more competition.  The ₪ 1,200 limit means that the increased competition will only affect lower end items, not luxuries.  I would be interested to know why the government chose such a low number (why not, let’s say ₪ 2,000), but I agree with the idea.

The second price of legislation is also a step in the right direction, but is telling of the government’s ignorance of the issue at hand.  When someone does not declare the full value on the package, he is really only giving up the insurance on the package in the case of loss or destruction.  The value of something is what you pay to get it and I am not willing to pay customs duties in order to receive insurance on the package sent.  This legislation is not going to make any difference to me on any packages valued over $75 because the cost of customs is still too much for me to declare the items.

If the government want to both maximize tax revenue and help its citizens, it should analyze how much people would be willing to pay for insurance on packages and lower the import duty to that level.

Ronald Reagan won the 1980 election by using the Laffer curve to prove that he could raise government revenue by reducing certain taxes.  For those who are not economics nerds, the Laffer curve is a curve that shows the relationship between tax revenue and the various possible rates of taxation.  History shows us that his application was entirely incorrect, but the theory stills holds.  It seems that this is one of those very rare cases when tax cuts along the Laffer curve could be very useful.

Do you instruct your relatives declare the value of items that are sent to Israel?  If not, how low would the tax have to drop in order for you to tell them to declare the true value?

Trajtenberg: More tax breaks for the rich

 

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.

fighting financial dictatorship

Years ago, when governments needed money to help their respective economies, their options were limited to taxing their own people and invading other countries.  Such measures were difficult; after all, people generally dislike taxation (with or without representation) and other countries have a nasty habit of defending themselves.  A few hundred years ago, this all changed when western government discovered that they could just print money whenever they wanted.  But when new money was printed, government bureaucrats tended to waste it on superfluous projects.  To counter this problem, monetary policy was born.  Monetary policy dictated that money would not simply be created and spent; it would be created and loaned out to job creating businesses at varying interest rates.  This would ensure that the money would be given only to businesses so that they could help the economy stabilize and grow.

When money is created from nothing, there is a price, inflation.  Everyone who has money looses some of its buying power when the government makes more money to give to itself, whether for superfluous projects or for lending.  Thus, inflation is a flat tax on money and monetary policy is a tool for collecting a flat tax without asking anyone if they want to pay it.  This is very convenient; when government levies taxes, citizens have the gall to see if there is a worthwhile reason for it and even ask that the tax be progressive.

Ancient Rome was famous for its occasional use of dictators.  Dictators would, for a limited amount of time, assume absolute power and make decisions when the public proved unable to do so.  The head of the Bank of Israel is our dictator for money.  He can decide to supersede the normal way of collecting money and lay a flat tax on all of our money by changing the interest rate and lending money.  The mark of a great Roman dictator was not his conquests, but how infrequently and precisely he used his power and ultimately, when he returned it to the people.    The head of the Bank of Israel should be the same.  In fact it is the frequency with which it uses its power and its complete disregard for the voice of the people that was caused our current financial upheaval.

The Bank of Israel has already admitted that its policy of keeping interest rates low caused the housing crisis.  The bank of Israel kept interest rates insanely low (2%) for all of 2009 and 2010, forcing investors into the only market with a decent payoff, real estate.  And since investors generally have more money than private owners, housing turned from a basic necessity to a piece of a portfolio.

The Bank of Israel insists that it had to keep interest rates low; after all, if they would not have intervened, then exporters would have failed and there would have been massive unemployment.  It was a choice between housing and jobs and Bank of Israel had to make it.

Let’s look at the alternative.  Imagine what were to happen if representatives of the Bank of Israel were to meet the citizens of Israel and explain that they will have to pay more taxes in order to subsidize exporting companies.  Public outcry would ensue, but once the cries die down, citizens would rationally ask for terms and conditions.  Okay, maybe that’s a stretch, but at least the democratically elected representatives of the people could decide on a list of reasonable terms and conditions (perhaps they would even form a ministry dedicated to finance!).  Israelis could demand that the companies submit a plan for their use of the subsidy and explain how they will become self sufficient within the next few years.  Israelis could demand that CEOs of such companies receive limited pay or that the companies do not lay off certain workers.  Then, either the company would agree to the conditions, bargain them, or choose to fold.

Instead, the Bank of Israel decided to play God with the economy and tax the people to bolster the rich.  And with the oversight of the people disregarded, the companies that benefited from the monetary policy reaped the benefits while becoming addicted to government subsidy through the low interest rates.  Now these companies are weaker than before threatening “too big to fail” if the government cuts off their crack.

But at least unemployment is low, right?  And the cost of living has not risen too much, so everything seems okay.  Not exactly.  The low unemployment rate ignores the underemployed.  There is no point in measuring the cost of living to the average or minimum wage when the dispersion of wealth is out of control and there are dozens of loopholes that that enable employers to pay workers well below minimum wage.

Since the social protests began this past summer, it has been difficult to pinpoint exactly what went wrong.  Bibi blames bureaucracy, the Bank of Israel blames the global economy and the Ministry of Finance isn’t sure who to blame because Israel still has low unemployment and solid growth – and this is the problem.  It is exactly this blaming, inaction, and relinquishing of power while denying reality that caused this financial crisis.  It was the government’s secession of oversight to the Bank of Israel and the Bank of Israel’s secession of Israel’s economy to the global economy that caused the current crisis.  As long as our representatives in the Knesset refuse to take back power from the Bank of Israel, they cannot do anything to fix the economic crisis.  And if they refuse to do anything, I suggest we get rid of them and elect representatives who will.

milk and honey, hold the oil

Golda Meir is famously credited for saying, “Moses dragged us for 40 years through the desert to bring us to the one place in the Middle East where there was no oil.”  Her statement, although made in jest, hits on an important note for those who believe in the sanctity of the land and see it as a blessing from God.  Most of my life, I was taught in Yeshiva that God wants the Jewish people to work and pray for their food; so easy money could not be an option.  But in the field of economics, there is a different answer.  A country’s richness in oil is not a blessing; it is a curse, a resource curse.

A resource curse is a natural resource that, while bringing in money, tends to cause the country to have less economic growth and worse development than if it were to be without the resource.  Looking at Israel’s oil rich neighbors, this theory can shed light on the blessing of milk and honey, but not oil.

Countries with a resource curse become disconnected from their people and are prone to tremendous corruption.  Governments quickly become small clans who fight and cause regional conflict in order to secure the primary asset of wealth and then guard the treasure to make sure it does not leave their jurisdiction.  Pretty soon national money, which should be spent on the country’s citizens, is instead spent on bribing the right people for the right favors in order to ensure that leaders stay in power.  The government no longer sees a need in investing in education; after all, it isn’t the people who bring money to the country, it’s the oil.  In the end, this deadly combination of a selfish government based entirely on withholding from the people and massive amounts of money eventually erupts into massive civil rights violations, ending in disaster and death.

Furthermore, financial dependence on natural resources can cause many economic problems.  The Dutch curse, named for what happened in the Netherlands after finding massive amount of natural gas in 1959, occurs when the natural resource drives people to invest so much in the country that the currency rises tremendously, allowing those selling off the resource to make a lot more, but forcing everyone else working in exports to suffer tremendously (Israel’s strengthening shekel is bringing Israel a similar problem now, which through public policy, is affecting the housing market.)  Finally, reliance on a single source of income tends to cause a country’s income to be extremely volatile with all of its eggs in one basket.

Does this mean that every natural resource is a curse?  Of course not.  In fact, most of the countries with an oil curse were totalitarian beforehand, and there are many oil rich countries without totalitarian regimes.  But when the threat of totalitarianism rises, oil becomes a weapon and a means of subjugation.  Were it not for the power that oil has given our dictatorial friends, much of the Middle East riots going on now would have occurred decades ago and would have been less bloody.  Without oil, Gaddafi would not be able to hire mercenaries to kill his own people and the Kind of Saudia Arabia would not be able to bribe his people temporarily until the regional anger subsides and he returns to the height of his power.

Without oil, Mapai was unable to maintain a grip on Israel and permanently enforce a  socialist ideology on its citizens.  Without oil, Israel learned to develop its human capital and turn into a service economy and high-tech powerhouse.   Without oil, Israeli businesses learned to diversify their investments, so that while Israel was hurt in the recent depression, it was not nearly as damaged as the United States or Europe.

As for Leviathan, stay tuned…

I pay you pay we all pay for Payis

 

I was going to write this as a proper article, but I’m just going to get to the point.  I hate Mifal HaPayis.  They prey on the poor and ignorant, and are nothing more than a huge deadweight loss in the Israeli Economy.

Mifal HaPayis, like most lottery games, markets heavily toward the poor and preys on desperation and the desire for quick money.  And although I am an outspokenly libertarian and believe that every person is responsible for his or her own actions, I understand that people are affected by the society around them; most parents would not raise their child in a crack den even if it meant cheaper rent.  As a society, we have chosen, and rightfully so, to help those among us who have not succeeded financially and are in desperate need of assistance.  But if we allow a predator in their midst, tempting them with easy money while branding their vice as philanthropy, then we are really just giving our money to the predator instead of giving it to those in need.

But what of all the good Mifal HaPayis does?  What of all the schools they build, the community centers they fund and the other money they give to charity?  If I steal a million shekels from you and generously give back half a million, would you say I was doing any good?  If Mifal HaPayis did not exist, our society would be richer, less welfare money would be wasted, more money would be collected through regular taxes and we would all be better off.

Instead of standing up to a deadweight loss on Israeli society, the Israeli government not only endorses Mifal HaPayis, but they allow Mifal HaPayis to  brand themselves as the builders of Israel, legitimizing themselves on schools buildings and community centers.  I am not sure of the lottery practice all over the US, but I can say that NY, even though it has a lottery, would not dare let the lottery brand itself as a saint and market itself to children the way Israel does.  Even if the lottery funds are used to build schools, the NY government understands that gambling is gambling and school children should not have to associate the lottery with tzedakah.

This past Shabbat, I noticed a flyer for a new contest sponsored by Mifal HaPayis.  This contest challenges religious Jews to submit an essay on the subject of tzedakah to be judged by a distinguished panel including a Rosh Yeshiva of Ponevezh and several other prominent Rabbis.

Let me make a point loud and clear to the distinguished Rabbis endorsing Mifal HaPayis – stop endorsing an agency that is stealing my money!  You want to make me pay more taxes to support Torah learning – fine, raise my taxes.  But do not advocate an agency designed to ensnare the poorest among us just so that the said agency can take money for itself and then decide to play God as it allocates what they think is generous.  The ends do not justify the means.

To be fair to the reputation of Israeli Gedolim, I would like to mention those who has been a major opponent of Mifal HaPayis since day one.  Rabbi Ovadia Yosef, former Chief Sephardic Rabbi and current Leader of Israeli Sephardic Jewry, has time and time again referred to Mifal HaPayis’s actions as theft and has ruled that no Jew should participate in any of their games. 

I am not a posek, but this is not simply a matter of kashrus or anything else that affects the people for whom the halacha is being determined.  The Ashkenazic Poskim who endorse Mifal HaPayis not only allow their own followers to throw their money into the trash and perpetuate a cycle of poverty, but endorse the theft of money from every tax paying citizen of Israel.

So what can we do about this Mifal HaProblem?  Educate your children to associate Mifal HaPayis with gambling, not charity.  Contact prominent Rabbis who endorse Payis and teach them to understand the error of their ways.  Finally, reverse the branding of Payis and when you see their emblem, call it what HaRav Ovadia does – theft.

you say “tomato” I say, “really?! where?!”

Unless you’re a very strict carnivore, you’ve probably noticed that the price of tomatoes in Israel has skyrocketed while the quality has plummeted.  According to an article on Ynet, stores in Israel are blaming the hot summer and low supply during the High Holidays for the expensive low quality tomatoes.  But this only tells one piece of the story.  Israeli farmers are still producing better quality tomatoes for export, but we in Israel are unable to buy such tomatoes, even if we are willing to pay more.  Why is this?  Where have all the good tomatoes gone?

The answer to this economic conundrum is what is commonly referred to as the “shipping the good apples out” theorem.  This theorem was developed by economists Armen Alchian and William R. Allen when observing a letter written to a local paper asking why no good apples were available to purchase in the region where the apples grew.  Alchian and Allen explained that when two grades of a product are increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is true because the added per-unit amount decreases the relative price of the higher-grade product (thanks wikipedia!)

Okay, now in English:

Suppose that better quality tomatoes (BQ) cost ₪ 25 a kilo and lesser quality (LQ) tomatoes cost ₪ 10 a kilo.  This means that the cost of eating one kilo of better quality tomatoes costs the same as eating 2.5 kilos of lesser quality tomatoes or 1 BQ = 2.5 LQ.  

Now suppose that it costs ₪ 5 to ship a kilo of tomatoes out of Israel, no matter what the quality.  This means that outside of Israel BQ will cost ₪ 30 (25 + 5) and LQ will cost ₪ 15 (10+ 5) or 1 BQ = 2 LQ.

Since the relative price of BQ to LQ changes, the people who live out of Israel consider it more worthwhile to buy the better quality tomatoes.  This will ultimately drive up the price out of the country and make it more worthwhile for producers to ship their better tomatoes abroad.

This theorem has plenty of applications beyond produce.

1 – War – According to some historians, this theorem explains why the North’s blockade was so successful during the American Civil War.  During the Civil War, blockade runners mostly smuggled in luxuries, not necessities, leaving the South to starve.

2 – Criminal Policy – By giving harsher punishments to marijuana users, the government may actually encourage marijuana users to use harder drugs like cocaine and heroine.

3 – Other Luxuries – According to Economist Tyler Cowen, the Alchien – Allen theorem implies that Australians drink better quality California wine and Californians drink better quality Australian wine.

Getting back to tomatoes.  My personal advice in the short run is to try to buy fewer tomatoes and that the tomatoes you do buy should be cherry tomatoes.  Cherry tomatoes may cost a bit more (I bought a kilo for ₪ 15 last week) but they last much longer, so you know that while you are spending a lot of money, you will at least be able to cut down the risk of wasting tomatoes that already cost an arm and a leg.  Also keep tomatoes in mind a week from this Friday when we begin asking for rain (“ותן טל ומטר”).

 On a happier note, clementines hit the market recently. They are tasty and very cheap (₪  5 a kilo.)  Maybe I’ll have a fruit salad instead…