A little over a year ago I predicted that the Trajtenberg Committee
recommendations that were about to be enacted would stifle economic growth and
lead to lower tax revenue. As a reminder, the Bill to Change the Tax Burden was
implemented starting from January 12, with corporate, capital-gains and
dividends tax rates increased. This was supposed to help generate more revenues
and would offset the cost of Trajtenberg’s recommendations.
many emails from irate readers saying that I should “stop defending the rich,”
and that “the government needs to give more to the middle class.” Well, the jury
is in, and it looks like I may have been correct.
This week the Finance
Ministry released a report on the much-larger-than-expected budget deficit, and
it has made for good political fodder. Opponents of the prime minister have used
the report to bash his economic policies, some even calling for more government
spending, others calling for more middle-class relief and, of course, some
calling for higher taxes.
If one actually takes the time to read the
report, available on the Finance Ministry’s website, you will find out some
fascinating data. It’s not that out-of-control spending was the culprit. The
ministry’s budget makers actually did a heck of a job predicting spending. They
were only NIS 2 billion short of estimates, and with expenditures of NIS 285b.,
that’s pretty impressive.
So what’s the culprit of the
larger-than-expected budget? Shortfall in expected revenues.
Here is where
someone at the ministry needs to fall on his sword and resign.
irresponsibility in the revenue forecast borders on the scandalous. The fact is
that tax revenues increased 3.4 percent in 2012 over the previous year. That’s
pretty much equal to Israel’s GDP growth for the same period. The problem is
that the Finance Ministry forecasted tax revenues that were supposed to be
According to their forecast, tax revenues should
have increased by more than 8%.
Why was that so preposterous? Because in
better economic years like 2010 and 2011 tax revenues increased by 6.5% and
4.3%, respectively, commensurate with GDP growth. No one in their right mind
would have forecasted that the Israeli economy would grow by 8% in 2012. So what
the heck were the Finance Ministry officials doing? I don’t like saying I told
you so, but I told you so. If you look at the tax haul from those areas that had
tax increases, you will see that the tax increases had an opposite effect: lower
or steady revenues. Capitalgains tax revenue dropped by a staggering 30% over
2011 as foreigners bailed out from the Tel Aviv Stock Exchange, and smart
investors booked their gains at the end of 2011 to pay the lower rate. Corporate
tax revenues were flat, even as the economy grew over 3%. A note to all
politicians considering raising taxes: No society has ever been taxed into
In a ground-breaking paper published by the Adam Smith
Institute titled “The Effect of Capital Gains Tax Rises on Revenues,” more than
50 years of data was collected, and it showed that increases in capital-gains
tax rates actually lowered the revenues that governments took in. When will
decision makers ever learn? In this election season how many times do we hear
how a certain parliamentarian wrote this law, or a various party gave some goody
to a certain constituency. Is this helpful for the economy? The answer is
What needs to be done to lower the deficit is to unshackle the
economy and let it grow. Encourage investment, and incentivize job creators.
This is the only way.
I want to remind readers of
something else I wrote last year. Before any more damage is done, I urge the
local policy makers to read former Florida governor Jeb Bush’s defense of
capitalism in a Wall Street Journal editorial titled “Capitalism and the Right
to Rise.” In lamenting the current state of economic freedoms he says: “But when
it comes to economic freedom, we are less forgiving of the cycles of growth and
loss, of trial and error, and of failure and success that are part of the
realities of the marketplace and life itself. Increasingly, we have let our
elected officials abridge our own economic freedoms through the annual passage
of thousands of laws and their associated regulations. We see human tragedy and
we demand a regulation to prevent it. We see a criminal fraud and we demand more
laws. We see an industry dying and we demand it be saved. Each time, we demand
“Do something... anything.”
He continues: “We either can go down the road
we are on, a road where the individual is allowed to succeed only so much before
being punished with ruinous taxation, where commerce ignores government action
at its own peril, and where the state decides how a massive share of the
economy’s resources should be spent. Or we can return to the road we once knew
and which has served us well: a road where individuals acting freely and with
little restraint are able to pursue fortune and prosperity as they see fit, a
road where the government’s role is not to shape the marketplace but to help
prepare its citizens to prosper from it.”
Amen. Happy voting.
Aaron Katsman is a licensed financial adviser in
Israel and the United States who helps people with US investment accounts.