Your Investments: Flug’s prescription will kill economy

Economics 101: No nation has ever taxed itself into prosperity.

February 19, 2014 23:03
4 minute read.
Bank hapoalim

Bank trader. (photo credit: NIV ELIS)


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“Every time in this century we’ve lowered the tax rates across the board, on employment, on saving, investment and risk-taking in this economy, revenues went up, not down.” – Jack Kemp

I just finished a job search to find a replacement for my office manager who will be going on maternity leave. I was inundated with resumes, counting over 100 for what was advertised as a secretarial position. While my sample size is statistically insignificant, I am comfortable saying that whatever the Israeli unemployment rate is officially listed as is overly optimistic. Very qualified people are looking for jobs and can’t find them.

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I debated long and hard about hiring two people but decided in the end that I couldn’t afford it. Business is expanding and I have more work than one person can handle, thank G-d, so why didn’t I hire a second person? Because as a small-business owner I have seen my personal, corporate, capital gains, dividend and VAT taxes (just to name a few) all rise substantially over the past two years – all in the name of social justice and trying to lower the cost of living.

And what have we received for all of this? A slowing economy! Not to brag, but this is exactly what I predicted in at least four articles that I penned over the past two and a half years.

Where is the growth?

In a recent speech on the future of Israeli society sponsored by the Central Bureau of Statistics, Bank of Israel Governor Karnit Flug spoke about the slowing economy and the need for expanding social services for the poor, increased spending on education and health care. How does she propose to pay for this? You guessed it: higher taxes. Hello, this is the exact reason we have a slowing economy.

These policies are job killers and are sucking the blood out of small- and mid-sized business, the real economic engine of any economy. Wouldn’t you expect the central-bank head to speak about growth? How about a few words on growth from Finance Minister Lapid? Even the man who purports to understand these issues better than anyone, Prime Minister Netanyahu, has overseen tax hikes year in and year out.

Economics 101: No nation has ever taxed itself into prosperity.

Recipe for success

Incentivize job creators, lower taxes, encourage investment, let everyone take home more of their hard-earned money – and watch the economy flourish. Why does anyone think that punishing business is going to provide more revenue over the long run? Want to fund social services? Do it through economic growth.

A strong economy will provide much more revenue over time than these tax increases will ever do. It’s pretty simple: You turn a negative into a positive. Instead of thousands of people receiving payments from the government (paid for by you and me), they would be employed and pay into the system instead of taking from it.

Cost of living

Much of Israel’s economic policy over the past three years has focused on trying to bring down the cost of living. The Trajtenberg Report was supposed to be the blueprint to achieve this. All it has achieved is to stifle growth, and the cost of living is still high. Why? Because the solution to lower costs has been by taking from one group and subsidizing another – all in the name of income “inequality” the rallying cry of the Left. That’s no solution, as we can see.

Want to lower the cost of living? Encourage competition and eliminate much of the bureaucracy. The best example that we have witnessed over the past five years is the opening up of the cellphone industry. The outcome of that single move has been both better service and unbelievably cheaper rates. Why don’t we implement this throughout the entire economy? A recent article in Forbes dealt with curing the US economic ills and quoted from economists Stephen Moore and Julian L. Simon in their report, “It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years”: “If we are truly following growth maximizing policies, we could conceivably do even better than we have in the past. At sustained real growth of 4% per year, our economic production would more than double after 20 years. After 30 years, GDP would more than triple. After 40 years, a generation, total US economic output would nearly quadruple. America would by then have leapfrogged another generation ahead of the rest of the world. Achieving and sustaining such economic growth should be the central focus of national economic policy, for it would solve every problem that plagues and threatens us today.”

And as for the poor, the report continues, “Sustained, rapid economic growth is also the ultimate solution to poverty, as after a couple of decades or so of such growth, the poor would climb to the same living standards as the middle class of today.”

Sound like just the medicine needed for the Israeli economy.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book
Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

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