Trajtenberg’s Taxing Task

The Trajtenberg Committee faces the Herculean task of reconciling protesters’ demands for social justice with the government’s determination to maintain budget discipline.

Prof. Manuel Trajtenberg (photo credit: Mark Neiman / GPO)
Prof. Manuel Trajtenberg
(photo credit: Mark Neiman / GPO)
THE TENTS REMAIN STEADfastly in place, on Rothschild Boulevard in Tel Aviv and other encampments around the country.
The protest events and marches continue, gaining momentum as time goes on.
Israel’s summer of discontent has already had a major impact on the country’s public discourse and the media, and challenged the political level to find a response to what is, ultimately, a broad-based protest against the socioeconomic policies adopted by consecutive governments over many years.
What is still unclear is whether these protests can or will be translated into a major shift in the country’s economic direction.
Throughout history, many protest movements have floundered as they attempted to transition from general slogans to the gritty details of economic policies.
Under pressure from protest marches that brought out as many as 300,000 protesters in several cities, Prime Minister Benjamin Netanyahu has appointed a committee composed of 14 economists, academics and officials, headed by Tel Aviv University professor of economics Manuel Trajtenberg. The committee has been charged with preparing a detailed list of economic changes intended to meet at least some of the grievances aired by the protesters. Expected to complete its work by mid- to late September, the committee will then present its proposals to the government’s 16 minister socioeconomic cabinet, which will then pass on its recommendations to the full government for approval.
The Trajtenberg committee includes Eyal Gabai, the outgoing director general of the Prime Minister’s Office; Eugene Kandel, the head of the National Economic Council; Gal Hershkovitz, the Treasury’s budget director; Avi Simchon, a Hebrew University economist; National Insurance Institute Director General Esther Domenicini; Karnit Flug, the Bank of Israel’s deputy governor; Pnina Klein, a Bar-Ilan University professor and Israel Prize laureate in education; and Rafi Melnick, vice president of the Interdisciplinary Center in Herzliya.
Trajtenberg, who did not respond to a request by The Report for an interview, is a well-regarded economist, and his selection to head such a committee was not considered a surprise. He was born in 1950 in Argentina and came to Israel at age 16. After completing a PhD in Economics at Harvard University, he began a long career as a professor at Tel Aviv University. Trajtenberg is chairman of the Planning and Budgeting Committee in the Council for Higher Education, has served as chairman of the National Council for Economics in the Prime Minister’s Office, and, based on past publications and comments, is considered ideologically sympathetic to some of the grievances raised by the protest movement, while being conservative about controlling budget deficits.
The Trajtenberg Committee, even with all the best of intentions, faces a difficult task. Trajtenberg reportedly asked for and received from Netanyahu unlimited scope in the range of policies that his committee may review. That may yet turn out to be a twoedged sword, however, as the committee’s recommendations may be scrutinized as much for what they failed to address as for what they included.
MUCH INITIAL MEDIA SPECulation on the Trajtenberg Committee’s agenda focused on reform of the taxation system. The overall tax burden in Israel in 2009 was 31.4 percent of gross domestic product (GDP), which is quite close to the OECD average of 31.1 percent. When one looks at the details of the tax breakdown, however, a different view emerges. The direct tax burden on the labor cost of a childless individual with a salary of 67 percent of the average wage (used as a standard point of comparison) comes to only 13.4 percent in Israel, compared with 32.4 percent for the OECD average, which puts Israel in 30th place out of 31 OECD members.
The low direct tax rate has to be balanced by high indirect tax rates, such as excise taxes on fuel and cigarettes and the valueadded tax (VAT), which are regressive in that they comprise a greater relative burden on low-income earners than high-income earners. Israel’s VAT, the primary indirect tax, is the highest in the OECD as a percentage of total tax revenues, at 33.5 percent.
At the same time, Netanyahu has placed great stress on reducing the corporate tax rate, which was cut from 36 percent to 24 percent. His government has already prepared legislation to bring that rate down further to 18 percent. In comparison, the OECD average marginal corporate tax rate is 26 percent.
The high rate of regressive indirect taxation relative to progressive direct income tax and corporate taxes is one of the reasons that middle-class Israelis have been feeling squeezed in recent years, which is one of the main grievances expressed by the protest movement. The reductions in the top marginal income and corporate tax rates have also contributed to a general sense that the wealth gap in the country has been increasing.
There are many topics in addition to taxation reform, however, that are included in the broad range of demands expressed by the social protest movement leadership, including demands for increased public spending on health, housing, education and social services.
It remains to be seen to what extent the Trajtenberg committee will be willing to recommend significant spending increases, given budget constraints and considering the fact that under Finance Minister Yuval Steinitz there actually has been a recent increase in funding for some items, such as higher education and dental care for minors.
And consideration of those issues would still leave untouched the truly politically radioactive questions of state support for West Bank settlements, ultra-Orthodox housing, or the $13 billion defense budget, which comprises 7 percent of GDP.
“IF I WERE IN MANUEL Trajtenberg’s position, I would first ask [the government] which subjects are politically viable for consideration and which are off limits,” Eyal Winter, professor of economics at Hebrew University and director of its Center for the Study of Rationality, tells The Report. “Can the committee recommend fundamental changes with regards to [the low] labor participation among the ultra-Orthodox and the Arab populations? That is a politically charged issue but with potentially significant implications.
Can the committee deal with the question of the lack of competition in the market due to cartels? Will the committee’s recommendations be backed up by legislative initiatives?” Joseph Zeira, also a professor of economics at Hebrew University, questions the very basis for the establishment of the Trajtenberg committee. Zeira is a member of an “alternative” committee established by the protest movement leadership in response to the Trajtenberg committee appointment.
“The whole move of setting a committee of experts [by the government] is not a solution but part of the problem,” Zeira tells The Report. “For many years the government led a radical policy of transforming the economy without due and transparent public debate. It was camouflaged in a number of ways. One was the public focus on the Israeli-Palestinian conflict. The second was the sad fact that all the big parties share the same neo-liberal ideology and thus there was no real open debate on the policies. The few who opposed it were called in derision ‘social’ or even ‘populist.’ “The third reason is that this massive transformation was not presented as a political choice, but as an economic necessity. In the Caesarea conference in 2009, I led a team that presented a study that showed how this claim was basically false (and we were not the first to say it). We have shown that the size of government, measured by the ratio of public expenditures to GDP, or the tax burden, which is measured similarly, do not have significant effects on economic success. Hence, the decision on how large should the government be is a political, value-based decision and not an economicprofessional decision. Thus, when the public raises a demand to change this policy, it should not be classified again as a professional issue, by turning it to an ‘experts committee,’ but it should lie at the doorstep of the political leadership, the government.”
Gidi Grinstein, the director of a Tel Aviv-based policy group at the Reut Institute, and a member of an eight-person task force that is participating in some of the Trajtenberg committee discussions, is optimistic that the committee will have significant impact.
“There is no better appointment than Trajtenberg,” says Grinstein. “He is the right person for this task. His committee can signal the economic direction for the country for the next 15 to 20 years, and he has already stated that his committee’s report will include both concrete proposals and a section on the broad direction we need to take. No one can make all the changes required in one swoop, but the direction can be signaled. We are at a dramatic point in our history. This could end up in a stand-off for years, or we can make a historic correction.”
Grinstein tells The Report that among many competing priorities, he places emphasis on raising real available income in the country and boosting productivity. “Real available income is what people have to spend after government takes taxes, relative to the cost of basic living,” he explains.
“Real available income can be raised by tax reform, which will certainly happen in the near future. But in the long-term, income rise must come from productivity.
Productivity [in Israel] has been rising exclusively in the highest class of education and skills. We must focus productivity increase in the weaker, challenged classes.
One third of working Israelis work in small businesses. The civil service can be made more efficient. Traditional industries need to undergo productivity increases. It is possible.
Our space for growth is huge.”
THE LEADERSHIP OF THE SOCIAL protest movement has set a very high bar by making the attaining of “social justice” one of its most prominent demands. As a rallying slogan, social justice can attract large crowds, partly because it is difficult to imagine anyone opposing justice and partly because it is sufficiently non-specific to allow a plethora of divergent interpretations.
The question is whether that vagueness may lead to disappointment, no matter what reforms the Trajtenberg committee eventually recommends, since the recommendations will inevitably fall short of achieving full social justice.
Furthermore, pleasing some may come at the price of displeasing others. In recent weeks, as marchers in cities demanded reductions in the prices of milk products, dairy farmers emptied milk containers on rural roads in protest against new government policies intended to increase competitiveness in the diary market, in part by allowing more imports. West Bank settler groups have expressed solidarity with the protesters, complaining of high housing prices in settlements, even as others have noted that the Israeli government spends a disproportionately high amount of its housing budget on settlements, with the implication that housing prices within the Green Line would be lower if fewer resources were diverted to settlements. If giving to some means taking from others, what becomes of a broad-based protest movement when “social justice” is translated into specific details? “Social justice is a utopian concept,” says Winter, who stresses that alongside his criticism of this broad choice of a goal he believes that many of the specific grievances of the protesters are justified. “There has never been social justice in any time in history, across countries, years and generations.”
In Winter’s view, it is “almost mathematically impossible” to achieve full social justice, simply because there are too many diverging interests in societies and there is no way to satisfy all of them, especially when fully satisfying one individual’s desires must come at the expense of another’s.
Even the more modest goal of minimizing social injustice can run up against difficulties, he notes, because of potentially competing interpretations. Should providing for the elderly take precedence over support for students, or the opposite? Does society have a greater obligation to assist army veterans or the disabled? “For any answer you give to those questions to distribute society’s resources,” says Winter, “you will find individuals who would rather distribute them a different way.”
Winter says he would not focus on social justice as a goal, but rather on reducing what he terms “social distortion.”
“Social distortion is a situation in which, say, two married individuals with university educations and full-time jobs cannot find affordable housing for them and their children, and find themselves unable to make ends meet in general,” he explains. “We know that that this situation is a distortion because we can look at how people live in other advanced economies in Europe and North America and see that this phenomenon does not exist in a broad context in those countries.”
Zeira, in contrast, has no qualms about translating “social justice” into concrete terms.
“‘Social justice’ is indeed a somewhat vague term,” he tells The Report, “but it is quite clear when we consider the Israeli situation in the last 20 years. In those years all governments led a policy of aggressively reducing the responsibility of the government to basic social services and needs.
The government reduced its supply of education, health, welfare, housing and transportation.
The money was used to reduce direct taxes, mostly for high incomes.”
The net effect of 20 years of economic and social policy, in Zeira’s opinion, has been no less that a reverse Robin Hood – transferring resources from the poor and the middle class to the rich. Social justice then translates into effecting a 180 degree turn against those policies and restoring social services.
“Another pattern of change,” Zeira continues, “has been a massive privatization of social services, which is also called ‘outsourcing.’ For example, many social workers are not hired any longer by the state or the cities, but by various NGOs, who pay them much less. ‘Social justice’ means reducing this widespread phenomenon. In short, social justice encompasses many detailed changes, but they are very clear, as all of them are measures that lead toward more equality. The protests therefore call for a U-turn in economic policy, from taking the government out of the economy to a government that takes responsibility and takes care, not of anything, but of basic needs and especially of the needs of those who have less.”
ANOTHER POSSIBLE STUMbling block for the Trajtenberg committee is the potential financial cost of meeting even part of the aspirations of the social protesters. Expanding public social services, providing public housing, even creating new government institutions to review and curtail the activities of market cartels, will cost money. The Netanyahu government, in defending itself against the harsh criticisms raised by the social protest movement, points to Israel’s enviable macro-economic condition, marked by growing GDP, low unemployment and tame inflation, and claims that this was achieved in no small part by the budget discipline to which it has strictly adhered.
Israeli economic leaders and commentators, nervously watching the dire consequences of running large multi-year deficits in several European countries, have increasingly taken to warning against “throwing the baby out with the bath water,” if relaxing budget discipline brings about an economic recession that will benefit no one, especially protesters complaining about making too little to make ends meet.
Finance Minister Steinitz stresses in every forum in which he speaks nowadays that it would be unwise to rock the ship of the economy when “we are still sailing in stormy international financial waters,” referring to continuing economic turmoil in Europe and the United States.
Winter claims that, perhaps counter-intuitively at first thought, it is precisely the good economic condition that Israel is in right now that has played a role in the timing of the eruption of social protest. “This could not have happened if there were a real economic crisis,” he tells The Report. “We did not see such protests two years ago [when the world recession was at its worst].
Major strikes and protests have almost always occurred when the economy is in good shape. That is rational, because one can legitimately demand more when there is more to be had, not when there isn’t anything.
That, in part, is one reason that the Finance Minister is so keen to remind us that there are still ‘dark clouds in the sky.’” In fact, says Winter, the Israeli youth who are leading the protests are in a better position to make demands than their counterparts in European countries because “intergenerational issues” are not prominent here. “The generation of the parents of the protesters was super-conservative with respect to debts, both at the national level and the individual level,” he notes. “In places such as Greece and the United States, the opposite took place – the older generation accumulated debts that need to be paid by the younger generation.”
UNSURPRISINGLY, WHEN ASKED what specific steps can and should be taken to implement true economic change in Israel, experts provide divergent answers.
Zeira lists in rapid-fire four steps that he would immediately implement. “First, the government should accept the just demands of the doctors’ strike,” says Zeira. “Second, it should cancel the biannual budget and set a new 2012 budget. Otherwise, no change is feasible in the coming year and a half.
Third, it should cancel the current rule of expenditure that limits growth in public expenditures to less than the rate of growth of output. This is another form of forcing economic decisions under the veil of bureaucratic rules. Fourth, cancel the arrangements law, which enables the government to pass many structural changes every year without due public discussion.”
Winter’s list begins with housing costs, which, in his view, have risen too far beyond the reach of middle-class families.
The price structure in Israel is problematic in general, he adds, and he ascribes this to a lack of competition. “Imports are monopolistically controlled, or sometimes forbidden entirely in some industries,” says Winter. “At the same time, there are too few companies producing products for sale within the country.”
Winter would also take aim at the taxation system, transferring tax burdens currently imposed by indirect taxes to direct taxes. At the same time, out of concern that foreign investment could be driven away, which could have negative consequences for the economy in general, he cautions against making taxation changes that go too far.
PERHAPS THE BIGGEST QUEStion marks the Trajtenberg committee faces are how the two main constituents of its recommendations – the government and the protest movement leaders – will react. Trajtenberg himself has tried to reach out to the protesters, making a surprise visit to a tent encampment on the night of August 14 to listen to and respond to grievances aired by the tent dwellers.
Despite this, Roee Neuman, a spokesman at the Rothschild encampment, tells “The Jerusalem Post” that the protesters regard the Trajtenberg committee “as a waste of time, appointed to kill time and hope we’ll fizzle out.”
Avner De-Shalit, professor of political science at Hebrew University, expresses skepticism regarding Netanyahu’s willingness to accept any recommendations that call for a significant change from the economic ideology he has championed all his career.
“Netanyahu, contrary to what some say, is not an opportunist,” De-Shalit tells The Report. “He is an ideologue, from the same school of thought as Margaret Thatcher, Friedrich Hayek, and Milton Friedman. His economic conceptions are very different from those of the protesters. It will be very interesting to see what happens.
“There hasn’t been this much passion in the streets in Israel since 1973, when the feeling that the Labor government then was not responding fully to protests eventually led to the rise of the Likud rule in 1977,” De-Shalit continues. “The current government may try to limit any reforms to minor tax issues moving tax burdens from one place to another. But I will be surprised if any massive change ensues, in education or social service budgets. Not that taxation isn’t an important subject, but reducing class sizes from 40 students to 25 requires finding extra resources. I can’t see a government that has been pushing for the privatization of the education system suddenly changing to move in the opposite direction.”
Winter agrees that the real test at the end of the process will be the significance of any reforms. “Will the opportunities here slip away in a ‘whitewash’ with some minor transfer of money from the one budget to another?” he asks. “There are big issues that need to be addressed. They should not be ignored.”