Higher taxes are not the solution

As long as the government keeps putting its hands in their pockets to take ever-increasing amounts of their income, they will not do so, and projected economic growth and state income from taxes will always fall short.

February 11, 2013 21:34
4 minute read.
Bank of Israel Governor Stanley Fischer following his resignation, January 30, 2013.

Bank of Israel Governor Stanley Fischer resigns 370. (photo credit: Sasson Tiram)


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As everyone knows, the only two certainties in life are death and taxes. But as things as are going now in Israel, death has one advantage: when you are dead, that’s the end of the matter. But if the government and pundits have their way, after you are taxed, you can always be taxed some more.

Let’s start at the beginning.

Everyone agrees that the government needs to tax people in order to function.

Since the government at least theoretically wants to maximize its income without oppressing the locals, the next step should be to design a tax system that efficiently raises money without driving people crazy, and that does not discourage them from earning more money, so they can pay more taxes. In other words, the best system would be a sales tax with no income tax. Failing that – a one-rate income tax, under or about 20 percent, with few if any exemptions or deductions other than expenses.

It is hard to understand how we and much of the world ended up with so many different kinds of complicated taxes that require the hiring of professional accountants to file them and thousands of state employees to collect and then redistribute them. Of course, the explanation is included in those last few words: The government wants not just to function, but also to redistribute the income of wage earners; from those who earned the wages to those its bureaucrats favor.

Leaving the moral problems of this system aside, a technical problem is that it does not work so well.

Among its many glitches are that once everyone knows the government is giving out other people’s money, everyone lines up for his share. A mechanic from Ofakim or an economic policy researcher from Jerusalem (mea culpa) may have difficulty getting some of that money, but the government’s own employees, and those of state-backed monopolies, can always strike and shut down our ports, electricity and so forth, and get more. What do we want, asked Shania Twain? More, of course, a lot more than we had before.

FROM THEORY to reality: Over the past few years, electricity rates have skyrocketed as the Israel electricity monopoly teeters on the verge of bankruptcy; yet almost all the added income went to pay wage hikes for the monopoly’s employees and its retirees.

Port workers signed several wage agreements over the past decade or so, guaranteeing they would not strike again, in return for huge bonuses. They got the bonuses – we got annual strikes and higher prices for all imported goods. The government essentially nationalized nursery schools (in Third-World dictatorships they once nationalized oil and gas, banks... we nationalize nursery schools), putting private teachers out of business and engendering huge budgetary outlays it didn’t have, for teachers and buildings it still doesn’t have.

The result is an unheard-of NIS 40 billion deficit. Literally “unheard of” – because the government did not want it to be heard of; when it was revealed, the most definitive action taken by the finance ministry was to search for the person who leaked the story.

All the local pundits say taxes have to be raised.

Retiring Bank of Israel governor Stanley Fischer has been pushing for tax hikes for years. Manuel Trajtenberg, who headed a committee formed after hundreds of thousands of Israelis took to the streets to protest the high cost of living, of which the tax burden is a major part, followed the logic of Israel’s King Rechavam, who when his subjects asked for relief from the burden replied: “I’m going to increase your burden; my father chastised you with whips, I’ll get you with scorpions” – and Trajtenberg recommended more state spending and higher taxes.

Before and just after the elections a slew of recommendations came out of the finance ministry (or from reporters who were expressing their own desires but thought they would sound better if attributed to the ministry): everything from raising the purchase tax on cars, already the world’s highest, to hiking corporate tax rates, to charging a special one-time mid-year tax on everyone in 2013. The government just now put into effect a new two percent tax on high incomes.

Its officials have declared war on non-taxed income, instead of asking why so many normally law-abiding people find a need to avoid or even evade taxes.

FEW PEOPLE would argue that taxes encourage growth. Taxes are the cost of labor, or investment, and if they rise, the cost rises and people “buy” less work or investment. So the government gave out lots of money it did not have, the country is teetering on the verge of recession, unemployment is higher than it has been for years – and our bureaucrats and columnists are calling for higher taxes and slower growth.

One can hope the new government will not choose a new governor for the Bank of Israel, minister of finance, Knesset Finance Committee chairman and various other officials who want to continue the irresponsible tax-and-spend behavior of the past that has done such wonders for the economies of Greece, Spain and much of Europe, but who know that the key to Israel’s economic survival is economic growth, and that given half a chance, Israelis will grow the economy.

As long as the government keeps putting its hands in their pockets to take ever-increasing amounts of their income, they will not do so, and projected economic growth and state income from taxes will always fall short.

The author directs the Public Policy Center at the Jerusalem Institute for Market Studies (JIMS).

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