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
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.
But what about the points? Certainly all the new
points for young fathers should fix this up, right? All right, let’s completely
disregard women (after all, the Trajtenberg Committee certainly does...) and
deal with the case of a father getting four extra points for his
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
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.
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.
is the author of Shomer Shekalim (shomershekalim.wordpress.com), a blog