Your investments: Tax increases and your Israeli stocks

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.

By AARON KATSMAN
Stock Traders 311 (photo credit: REUTERS)
Stock Traders 311
(photo credit: REUTERS)
So it certainly appears that the way that Finance Minister Yair Lapid will try and balance the budget is to increase all sorts of taxes. From a 1 percent hike in VAT, income and corporate taxes, to taxing the sale of property, the only solution that is being talked about in the media is to raise taxes together with a bit of spending cuts.
Needless to say, I am quite confident that these tax increases won’t end up balancing the budget and will potentially cause damage to the local stock market. So instead of helping the vaunted “middle class,” they will once again get screwed by the very one promising their salvation. Kind of ironic! The problem is that if the real engine of any economy, namely small- and mid-sized businesses, receive another tax increase, that increased burden will probably end up costing jobs. “Oh c’mon Katsman, they can afford it, it’s just 1 percent, and the business owners are all rich anyway. What’s the big deal?” Well the fact is that most small- and mid-sized business owners are not at all rich and are struggling month to month to make ends meet. By raising their corporate tax and VAT that they pay by 1% each, their profit margins may shrink to the level that they aren’t profitable. And remember the point of business is for the owner to make money.
Middle-class people will have to pay more each time they go shopping, will have less money to shop with and, to top it off, their hard-earned savings may drop as well. Sounds like a great solution.
Why am I so skeptical? Because we have been down this road so many times that it’s clear tax increases don’t work. I have a better solution” Lower taxes across the board and watch the economy boom. The state’s coffers will swell and the budget will be balanced. Unfortunately, I feel like a lone soldier beating a dead horse, constantly pounding the table for tax cuts.
But no one seems to be listening, so take it as a given that your taxes are going up again – for the second time in two years.
What about your portfolio? Flashback to December 2011, when populism trumped common sense as a result of that summer’s tent protests. That’s when I wrote about how devastating the upcoming tax increases would be for the economy. I wrote that with the hike in capital-gains tax, the government take from this tax would actually drop, and voila – as I wrote in a column a few months ago, revenue dropped 30%.
At the end of 2011, as the tax increases were about to take effect, I wrote: “The current issue for the Tel Aviv Stock Exchange, 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.”
Sound familiar? It just happens that the TASE, while posting a gain since that point, has severely underperformed major global markets. The S&P 500 has produced a 14% higher gain than the TA-100 index. Most regions throughout the world have easily bested the TASE, including Europe, which has been on the verge of collapse.
So what should you do? I am no fear-monger, I just like to tell it like it is. Readers of this column know that I am a big cheerleader when it comes to investing in Israel, but I am also a realist. We have seen the evidence in Israel that tax increases hurt stock-market performance.
Investors should speak with their financial advisers to analyze whether their Israeli stock exposure should be lowered in lieu of these tax hikes. While your pension money is mostly stuck in whatever fund you own, now maybe it’s the time to look at market opportunities around the globe, especially for your non-pension monies.aaron@lighthousecapital.co.il
Aaron Katsman is a licensed financial adviser in Israel and