On Tuesday, the Finance Ministry provided details of proposed fiscal cuts and
tax hikes to the government.
And, as is the case whenever “austerity
measures” are adopted to fight out-of-control fiscal spending, the poor and the
middle class will be the hardest hit.
From an across-the-board 11.5
percentage point rise in income taxes for all tax brackets – from the lower
class to the upper class to a one percentage point hike in value added- tax to 18
percent; from a cut in the budget for dental care to children under 12 to a cut
in child allowances; from annulling the subsidy for afternoon childcare for
children aged three to nine to a hike in parents’ payment for “free education.”
And we must not forget a brand new health tax on housewives.
All of these
measures will hit the poor disproportionately hard and the middle class will
find making ends meet increasingly difficult. Making the situation all the more
intolerable is the fact that these proposed cuts and tax hikes comes just days
after the revelation that many of Israel’s largest and most profitable
businesses hardly pay any taxes at all.
A Finance Ministry report
released this week based on 2010 data showed that four huge corporations – Teva
Pharmaceutical Industries, Intel Israel, Israel Chemicals and Check Point – paid
an effective tax rate of just 3.3% while smaller businesses paid a corporate tax
of between 13% and 20%. Indeed, these four companies received a whopping 70% of
the NIS 5.6 billion in tax exemptions under the law for encouraging capital
The same Finance Ministry report also noted that corporate
tax breaks rose from NIS 2.3b. in 2003 to NIS 5.6b.
in 2010. In 2011, a
minimum corporate tax was instituted (Amendment 68) that eliminated some of the
distortions in our tax system. But at the same time, it grandfathered in prior
tax benefits. Also, in 2011, the corporate tax rate for “export firms” (business
that export at least 25% of goods and services) dropped to 15% for companies
located in central Israel and 10% for companies in the periphery.
2013 the rates dropped further – to 12.5% and 7% respectively.
Israelis are rightly asking themselves why big business is not sharing the
burden. Why must they pay so many direct and indirect taxes while the largest
corporations headed by executives that earn some of the highest salaries in the
country enjoy such generous tax benefits? Why does someone earning between NIS
9,011 and NIS 14,000 a month pay an income tax of 21% (22.5% after the new tax
hike goes into effect in January) – not including a health tax and payments to
National Insurance – while big corporations pay an effective tax of just 3.3%?
Additional questions could be asked. For instance, why do companies like Teva,
Check Point, Intel Israel and Israel Chemicals remain in Israel instead of
relocating to, say, India? Is it solely because of the Jewish state’s low
corporate tax rate? Don’t these firms enjoy Israel’s abundant resources whether
natural (Israel Chemicals, via the Dead Sea Works, takes advantage of huge
Potash reserves) or human (Teva, Checkpoint and Intel enjoy highly educated,
innovative manpower)? Don’t they profit from the benefits of Israel’s basically
law-abiding society, courts, law enforcement and military that help ensure
business contracts and property rights are respected and overall security is
maintained? Do they not benefit from Israel’s roads, its land and sea
transportation routes and its telecommunication infrastructure which facilitate
the transfer of goods and services? Do these firms not also reap the benefits
from a fairly stable political system, democratic institutions and responsible
economic planning? That’s why international firms seek out Israel as an
attractive country in which to do business. But these corporations should return
the favor by paying a reasonable corporate tax.
Obviously, we cannot
expect the CFOs of these firms or their shareholders to volunteer to pay a
reasonable level of corporate taxes as long as they are given the option of
paying hardly any corporate taxes at all. Therefore, the discriminatory and
distorted aspects of our tax system need to be replaced with a clearer, simpler
and fairer tax code.
And these changes must be made immediately, as part
of the 2013-2014 fiscal budget and accompanying legislation.
Israelis see that big business is also being forced to share the burden to
ensure that the State of Israel remains strong, the bite of tax hikes and budget
cuts will be a little easier to bear.