Social Justice Protest 311.
(photo credit: REUTERS)
Israelis are beginning to reap the fruits of this past summer’s protests; the
problem is that the fruit may be rotten. While some in the middle class may have
received some tax relief thanks to the recently passed legislation based on
Trajtenberg committee recommendations entitled “The Bill to Change the Tax
Burden,” those that actually create jobs received a slap in the face. Not only
were corporate tax rates increased (when they were supposed to continue to be
decreased by 1% every year for the next 6 years), but both capital-gains taxes
and taxes on dividends were raised as well.
Now those that love to vilify
corporate greed and “piggish capitalism” ( and it’s really cronyism, not
capitalism, that’s the problem in Israel) are now doing cartwheels in the
streets, as “the rich guys got what they deserved.” The problem is that the real
engine of any economy, namely small-and mid-sized businesses, just received
another tax increase and that increased burden will probably end up costing many
jobs. In addition, transferring wealth from the wealthy to the less wealthy has
never worked to help the lot of those less fortunate.
What needs to be
done for the lower and middle class is not just to cut taxes – which is
important – but to incentivize them to invest their money in a business, real
estate or stock market. This is the way to grow one’s net worth. By increasing
the tax on investment, you are stifling the opportunity for economic prosperity
for the “have-nots.”What happened to Bibi?
The real shocker in this is
that Prime Minister Binyamin Netanyahu threw his support behind the plan.
Everyone is aware of Bibi’s economic philosophy, which is based on the
Reagan/Thatcher model, so why the sudden change? It was Netanyahu’s plan of
cutting taxes across the board on income, corporations and capital gains that
saved the economy from disaster a decade ago, and laid the groundwork for the
robust economic expansion that is the envy of the world. Now, in the face of a
global economic crisis and a slowing Israeli economy, he is cutting the lifeline
of the economy?
The cynics among us would say that he did this to: A) quell any
further protests that could wreak even more economic havoc, and B) gain popular
support and further his reelection hopes. Whatever the reason, it could have
damaging economic consequences.
While supporters of the
capital-gains tax increase say that this will increase revenues to the
government that it can then spend on a host of social issues, the data shows
that revenues will drop. In a ground-breaking paper published by the Adam Smith
Institute titled “The Effect of Capital Gains Tax Rises on Revenues,” over 50
years of data was collected and it showed that increases in capital gains tax
rates actually lowered the revenues that governments took in. The paper is a
must-read for those interested in the issue (too bad the Finance Ministry missed
it!). Here are some data points relating to the US economy that are worth
“In 1968, real capital-gains tax receipts were $34 billion at a 25
percent tax rate. Over the next eight years, the tax rate was raised four times,
to a high of 35%. But with the tax rate almost 10 percentage points higher in
1972 than in 1968, real capitalgains tax revenues were only $27 billion – 21%
below the 1968 level.
“In 1996, the year before the capital-gains tax
rate was cut from 28% to 20%, net capital gains on assets sold were roughly $335
billion. A year later, capital gains had leapt to $459 billion. (The tax cut was
retroactive to May 1997). In 1996, the [US] Treasury collected roughly $85
billion in capital gains revenues. In 1997, those tax payments jumped to $100
There are many more examples of this.
Impact on TASE
Stock market movement as a result of increases/decreases in capital-gains rates
can go both ways. The current issue for the Tel Aviv Stock Exchange (TASE),
which has dropped significantly this year, is that investors haven’t really been
in the mood to buy local stocks. Now add to the equation these new measures –
and more to come – that could hurt growth, and you have a recipe for continued
local stock-market weakness. The irony is that this actually is going to hurt
the very people that you are trying to help.
Thanks to caving in to
populism and political survival, it looks like the lower and middle class will
continue to spin their wheels and run in place, and not enjoy any upward
economic mobility anytime soon.Aaron Katsman is a licensed financial
professional both in the United States and Israel, and helps people who open
investment accounts in the United States. Securities are offered through
Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC,
MSRB, SIFMA. For more information, call (02) 624-0995, visit
www.aaronkatsman.com or email email@example.com.