Ethics at Work: Balanced growth

Increased progressivity is a positive feature of Bar-On's reform.

Bar-on fed up 224.88 (photo credit: Ariel Jerozolimski)
Bar-on fed up 224.88
(photo credit: Ariel Jerozolimski)
Finance Minister Ronnie Bar-On called a press conference on Wednesday to announce a dramatic proposal for a change in the income tax. Bar-On asserted that the new tax change will help the government meet its pledge to reduce economic gaps in Israel while continuing to encourage growth. The centerpiece of the proposal is a reduction in tax rates for Israel's middle class. Is Bar-On's plan likely to help Israeli workers? And if so, why is the Histadrut so adamantly opposed that it is threatening a general strike over the proposal before it has even been discussed by the government? To understand the proposal, we should start with some important background. Israel's income tax regime is nominally a progressive one. Progressive taxes mean that low-income individuals have the lowest tax rate, very wealthy people have the highest, and middle-income people are in the middle. Israel, like the United States, has six graduated income tax rates. You start at zero and go up to a maximum of 47 percent. (In the US the highest Federal rate is 35%, though many Americans pay state income taxes too.) The problem with Israel is that the rates don't go up very gradually. In America you move slowly up the tax brackets, with about $50,000 or more between brackets. In Israel you get to the higher rates very, very quickly. If we use "0 to 33" (percent) as a measure of acceleration like we would use "0 to 100" (kph) for a car, then in the US it takes almost $200,000 a year to get from 0 to 33, but in Israel it takes less than $30,000. That means someone making NIS 4,000 a month pays no income tax, but someone making NIS 12,000 a month is already paying 33%. Add another NIS 25,000 a month and you're already at the tippy top, and there is no more progressivity. Of course incomes in Israel are much lower than in the US, but still the difference in the "tax acceleration" is very marked. Bar-On's proposal would lower taxes on some of these middle-income families who are paying high-income-style tax rates, and make the system more progressive in fact, and not only in name. This is a positive step. At the same time, the proposal would reduce corporate taxes, which are generally considered to be progressive, so this would be a regressive change. Bar-On claims that the reduction in corporate taxes will make Israel more competitive internationally, thus offsetting the loss of tax revenue. The most controversial aspect of the plan is the proposal to eliminate the tax exemption for worker-training programs. This aspect triggered the threat from Histadrut chairman Ofer Eini, who had some choice words for this reform. He called it "failure to honor agreement on labor relations," and accused the Treasury of making unilateral actions "bordering on the indecent" and of adopting the most illegitimate modes of acting regarding worker relations. "The finance minister has returned us to the technique of improper struggles," he added. Eini stated his intention of declaring a labor dispute and afterwards a general strike if Bar-On doesn't withdraw his plan. It is obvious that Eini's rhetoric and threats are wildly out of proportion to Bar-On's relatively modest proposal to eliminate the tax deduction on training funds, which does not particularly threaten Histadrut members and is unlikely to increase their net taxes in the framework of the proposal; in any case, it has nothing to do with worker relations or collective bargaining agreements. Furthermore, this is merely a proposal that has not been approved or even discussed by the government. What bothers Eini about the proposal is that Bar-On made it by himself. Earlier in the year there was an initiative to make a special "social-economic council" in which the Histadrut and the Manufacturers Association would have had special influence on economic policy. This was a dreadful proposal that would have given non-elected, narrowly constituted interest groups special status, as if they were somehow authorized to represent "the workers" and "the employers." Bar-On torpedoed the proposal and Eini is seeking revenge. Eini's comments pointedly mentioned his generous "offer" to "assist" the Treasury in formulating economic policy for the State of Israel. I think the elimination of this exemption is a good step. The patchwork of special exemptions creates bizarre incentives and contributes to inequality. After all, the firms employing minimum-wage workers are in any case not contributing to training funds. A similar situation exists in the US, where employees with good jobs at large firms are able to get tax-deductible health insurance through their employers - a government benefit not available to less established workers. Of course, lower taxes are always better than higher ones, but since tax cuts, alas, involve a reduction in revenues, I wonder if the reduction of the corporate tax is really wise. If the Treasury is not taking responsibility for fiscal discipline, who is? Other ministries can hardly be expected to be clamoring for a balanced budget. Perhaps cutting tax revenues is meant as a political game, to compel other public-sector players to cut spending rather than risk a fiscal crisis with huge deficits. (This is a generous explanation of the Reagan deficits.) But history shows that budget brinkmanship is a game that two can play, and it is just as likely that other politicians, no less shrewd and experienced than Bar-On, will continue to spend and compel the Treasury to pick up the pieces. So I give the proposal two thumbs-ups - one for making the tax brackets fairer and more truly progressive, and another for eliminating a special exemption from taxes. But I'm not sure that a tax cut per se is justified, especially given the palpable squeeze in some government services. A revenue-neutral change would do more for the average Israeli. [email protected] Asher Meir is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem College of Technology.