The tax burden

Prime Minister Binyamin Netanyahu recently announced to the nation that rather than hike our taxes, he’ll increase the budget deficit to 3%.

In other words, he told us that rather than increase the state’s revenue, he’ll increase its debt.

The national budget is much like any household budget, except that it’s bigger and more complex. The core considerations are identical. The ideal both on the private and the public plane is not to spend more than comes in.

When expenditures outstrip income, individuals typically make up the shortfall via an overdraft, while the state runs a financial deficit. In both cases debt is incurred and, in both, the larger that debt becomes, the greater the burden and the inherent danger.

When things were good for the Israeli collective during 2010 and 2011, it meant an annual growth rate of 4.7% and a falling deficit. It was easier to make ends meet. Had these conditions persisted, our budget deficit was forecast to shrink to a mere 1.5%, constituting an exceptional achievement in international terms.

But the good times are over, for many reasons.

Looming large are the downturns in both America and Europe – our major trading partners. Foreign slumps lower the demand for our exports, while an artificially overvalued shekel makes our products too expensive and less competitive. Fewer exports mean lower revenues for the Treasury and less hiring, if not actual layoffs.

If things don’t worsen, 2012 will end with 2.5% growth and a 7.5% jobless rate.

Concomitantly, expenditures are up due to the social justice protests. This boils down to greater debt, unless more taxes are collected to cover the growing spending.

To put things in perspective, we need remember that in most developed countries the deficit ranges from 5% to 10%. However, the cost of borrowing is far higher for beleaguered Israel than elsewhere.

A higher deficit limit will enable the Treasury to desist from such unpopular moves as raising the regressive VAT this month by a full percentage point.

Yet there’s no certainty, as Finance Minister Yuval Steinitz owned up, that no taxes will be hiked.

Income tax is likely to go up by an average of 2 percentage points. Contrary to local myth, we aren’t the First World’s most overtaxed nation. In fact, the tax burden is heavier than ours in 18 of the OECD’s 31 members. Failure to increase the government’s income might inflict a deficit of nearly 5% on our economy, which comes perilously close to crisis proportions.

The populist clamor to levy extra-cumbersome taxes on the rich won’t plug the budget hole, because it would take at much as a 20-percentage point hike to achieve that. The resultant 70%+ income tax brackets would merely result in capital flight and more imaginative tax evasion.

Higher corporate taxes would bring on recession with unemployment figures that our economy would not be able to sustain. The only feasible alternative, despite the prime minister’s rhetoric, is some degree of an tax rise for all income brackets.

This is highly unpopular, which is why Netanyahu doesn’t dwell on the inevitability. This is also why those Treasury officials in charge of balancing the budget push for it.

The deficit could be trimmed by spending less. This would mandate an across-the-board cut in the outlays of all ministries. Yet any decision to tighten ministerial belts triggers sonorous outcries, political confrontations and yet more social protests.

The abiding temptation, consequently, is to forget the deficit for as long as possible. However, the notion of spending now and ignoring the future is irresponsible.

A bloated deficit cuts growth in the long run. It affects the economy much as an excessive overdraft paralyzes personal finances.

Probably the only compromise between the shorthaul temptation and the long-range danger is a modest tax increase for all income brackets, politically unsavory as it may be. It would do less harm than other available solutions, while preventing the national economy from sinking too deep into the red.

It is time for our leaders to tell it like it is and not to foster false expectations.