Fighting Israeli poverty demands ambitious welfare-to-work reforms

Raising monthly tax credits is an internationally recognized way to transform a “work less” culture.

By ALEX BENEDYK
March 22, 2015 22:24
4 minute read.
Boxes of food for the poor

Boxes of food for the poor. (photo credit: LATET)

 
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Poverty is a major problem facing Israel, and shows no sign of abating. According to the OECD Factbook 2013, from the mid-1980s to the late 2000s relative poverty rose in Israel more than in any other advanced economy.

Unlike absolute poverty that measures the number of people unable to afford the necessary goods and services to live, relative poverty measures the number of households earning less than half the national income. Astonishingly, currently one in five Israeli households suffer from relative poverty; one of the worst records in the OECD – a collection of 34 democratic, market-based economies. 

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This figure has remained stubbornly high and ranks Israel alongside countries with notoriously high levels of poverty such as Mexico and Chile. This indicates that Israel’s economic growth has been largely “cut off” from the poor and thus widened the gap between rich and poor. Encouraging greater take-up of the Earned-Income Tax Credit scheme (EITC), also known colloquially as “negative income tax” must remain a key strategy to tackle this issue, regardless of the post-election political landscape.

Israeli Arabs and the haredi (ultra-Orthodox) are the two social groups primarily responsible for such disappointing figures. Over 50% of households in these two groups are defined as poor, which is more than five times higher than the rest of the population.

Largely, this is caused by a lower labor-force participation rate, which is a percentage figure of the number of people in or actively seeking work. Whereas the average Israeli rate is around 60%, just one in four haredi men and Israeli-Arab women work. Unsurprisingly, this has lead to rampant poverty across the country, considering that these groups comprise about a third of Israel’s population.

The dire consequences of a significant proportion of the country living in poverty have been recently publicized in research by Pickett and Wilkinson (2010) in The Spirit Level. Here, they argue that poor sections of society lead to ills throughout, such as higher crime, higher rates of mental illness and less co-operation among citizens. Therefore, the distinct lack of laborforce participation among the ultra-Orthodox and Israeli Arabs not only affects their well-being but also society at large, and thus creates negative outcomes for all.



The Earned-Income Tax Credit scheme is designed to incentivize labor-force participation among low-income groups by offering monthly tax credits ranging from NIS 330 for parents with one or two children to NIS 720 for single parents with three or more children.

Offering greater credits for larger families is a clear indication of the desire to target ultra-Orthodox and Israeli-Arab communities, who have significantly higher birth rates than the rest of the population.

Moreover, the credit scheme is non-wasteable, meaning that even if household tax liability does not reach the monthly credit allowance, households are paid the difference, further encouraging entry into work despite the prospect of low monthly earnings.

While the scheme is relatively new, initially trialled in 2007, initial results are encouraging. According to research by the Bank of Israel in 2013, during the pilot phase 2007-10 the scheme created a 7% increase in recipients’ annual income. Disappointingly, only half those eligible signed up to the scheme. Research in 2012 demonstrated that raising the allowance by 45% and boosting coverage could lift 4,700 families out of poverty, partially as a result of the subsequent increase in sign-ups. In 2012 credit for single parents was raised by 50%, but both ultra-Orthodox and Israeli- Arab communities have comparatively low levels of single-parent families, meaning that the effect of the boost on these groups was limited.

Furthermore, just NIS 150 more (NIS 480) is on offer for parents with three or more children compared to those with one or two (NIS 330). Increasing the credit offered to larger families is necessary to persuade Israeli Arabs and the ultra-Orthodox to join the scheme and participate in the nation’s labor force. Under the current credit level, incentives may be warped such that it pays better for individuals to remain unemployed than to enter the job market.

Income support is means-tested, meaning that staying out of work may be the more profitable option for particularly poor households. This demonstrates an even greater urgency to raise the value of tax credit and thus incentivize work over inactivity.

A 2015 OECD report states that with regard to the Israeli Earned-Income Tax Credit scheme “coverage and generosity remains low,” and cites the scheme as a key route to improving Israel’s economy. Compare it to equivalent measures around the world and one can easily see why. Whereas Israel spends just 0.02% of GDP, equivalent programs in the UK and US involve markedly higher spending of 0.4-0.5% of GDP. Famously described by former US president Ronald Reagan as “the best anti-poverty measure to come out of Congress,” the US equivalent in 2010 reportedly lifted 5.4 million out of poverty including 3 million children.

Raising monthly tax credits is an internationally recognized way to transform a “work less” culture, and given how entrenched this has become in parts of Israeli society, a boost to the scheme is desperately needed to overturn Israel’s poor record on poverty.

Such a move might not make poverty history – but it would be a good start.

The author is a Research Fellow at the Jerusalem Institute for Market Studies.

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