The list of those who have signed the bill to implement a negative income tax is long and impressive. No fewer than 93 MKs have signed the bill, and it appears that not since the vote held by the Provisional National Council, at the end of which it was decided to establish a Jewish state in the Land of Israel, has there been such a consensus in the Jewish state's legislature. Two interpretations may be ascribed to the strange consensus created in the plenum: The first possibility is that this is a good bill that cuts across party lines. The second is that it is a populist bill, which makes it difficult for MKs who presented a social platform to take a stand and oppose it. The underlying thinking that gave rise to the negative income tax is correct. People should be encouraged to go out and work. However, the question is how to do this: by providing grants to workers, or through a circuitous path of participating in paying the wage - in other words, a benefit for employers. Renowned economist Milton Friedman wrote a series of impassioned articles that support the idea of a negative income tax. If it is such a good idea, why hasn't it been implemented in most countries in the Western Hemisphere? The answer to that question is simple. It is a very expensive law, one whose beginning is known but whose ultimate destination is cloudy. Furthermore, its effectiveness in terms of cost-benefit is somewhat doubtful. Working papers prepared by economists and presented to the committee examining the negative income tax at the Finance Ministry showed figures according to which the dimensions of poverty have decreased as a result of the law's implementation by just 0.9%. If what is being discussed is reducing poverty by less than 1%, there are cheaper and no less effective ways of fighting poverty. A former senior Finance Ministry official recently told TheBpost that subsidizing day care centers would enable women to go out and work, and would increase family income, and that this, in itself, would lead to a more than 1% reduction in poverty. "The cost of day care centers for working women would be infinitely lower than the cost of a negative income tax. The effectiveness of both these paths in reducing poverty would be identical," he said. Silvan Shalom, who served as finance minister, led the bill for implementing a negative income tax, and he knows the implications of a law bearing such a heavy cost. During his term as finance minister, Shalom initiated establishment of the Rabinovich Committee, which changed the Israeli tax world beyond recognition and, no less important, brought about a significant increase in tax collection. The Rabinovich Committee's main recommendation was to alter the tax basis, such that the test according to which the taxpayer's tax liability is determined would be a residency tax, and not where the income on which tax is owed was created. While this is not the forum for discussing the slew of changes in the Israeli tax world generated by the Rabinovich Committee, we will try to focus on two additional changes: reducing the tax on labor, and imposing a tax on capital gains. In 2002, Israel was in the midst of a recession. Terrorist attacks were a near daily occurrence, the security establishment was screaming for budgets, tourists canceled their trips to Israel and tax collection was at crisis levels. Along came the finance minister, who initiated a reduction in taxes on labor, and the imposition of a tax on gains in the capital market, which was in crisis. There were banner headlines, and this writer as well questioned the then-finance minister's ability to initiate a genuine revolution in the tax world, in the midst of an unusually powerful economic crisis. Despite the reform in income tax, a small economic improvement managed to bring about a rise in tax collection, although it was in fact the tax reform that led to a rise in tax collection. The logic was simple: The increase in available income would mostly be directed to consumption, which would jump-start the economy and lead to a rise in tax collection. That thinking was at the basis of Shalom's decision to go one step further with the law to implement a negative income tax. "At that time, we reduced tax for those earning more than NIS 5,000. The assumption was that in the second phase of the reform we would deal with those earning less than NIS 5,000. In my opinion, the economy today is ripe for embarking on this move. Despite the fact that it carries a heavy cost, at the end of the process the cost to the taxpayer will be negligible," Shalom recently told TheBpost. Shalom explains that among low wage earners the marginal tendency to consumption is close to one; in other words, nearly 100% of the available income (income, less taxes) is directed to consumption, which would lead to accelerating economic activity and increasing tax collection. Assuming that the family unit earns an additional NIS 500, it would direct at least NIS 400 to purchasing clothing, food and additional consumer goods. These purchases would lead to a rise in earnings among manufacturers, merchants, etc. - a rise in earnings that would be taxable. Manufacturers and merchants, who would earn a bit more, would also increase the scope of their purchases from additional elements that would be taxable. Therefore, ultimately, the effective cost of implementing the negative income tax would be negligible. There is wall-to-wall agreement on everything related to the need for a law to encourage work, but how can it be done? After all, the income tax mechanism is not built to take in about a million tax returns from salaried employees that need to be examined. If income tax officials (the supervisors) examine returns of salaried workers who are entitled to the negative income tax, they will not succeed in thoroughly checking returns of taxpayers who owe tax. And it is a short distance from there to harming tax collection. The alternative is to transfer implementation of the negative income tax to the National Insurance Institute (NII), which has been dealing with the entire subject of allowances for decades, and knows how to handle them. Shalom is aware of the criticism, and explains: "The entire subject of settling up vis- -vis the income tax authorities will be done through the deductions system, which in any event is carried out by employers. The employers deduct tax from those employees who owe tax, give the benefit to those entitled to it through the bookkeeping system, and ultimately submit the report to the income tax authorities. That solves the problem of the burden on income tax employees, and along the way it also solves the problem of filing the reports of those entitled to the tax benefit." "We wanted to create a link between work and allowances from the negative income tax, and it is hard to do that using the National Insurance system. Regarding the question of why not subsidize day care centers or use additional effective means to contend with the problem of poverty, you need to understand that those things are unrelated. If the state wants to fight poverty, it can do so in quite a few ways. In this specific case, we went with a supplemental move: encouraging people to go out to work and providing additional remuneration to the public of workers earning less than the tax threshold," says Udi Barzilai, who previously served as income tax commissioner and was a member of the Rabinovich Committee. The model, which at the end of the process was adopted by Shalom and the commission that he established on the subject of a negative income tax, ran counter to the position of the Bank of Israel, which is interested in having those entitled to the tax benefit independently file a return with the income tax authorities. Shalom and Barzilai argue that implementing the law according to the model developed by Shalom's committee in effect circumvents the general requirement to report that the Bank of Israel's model demands. "It needs to be understood that a person entitled to the tax benefit is usually a hardworking individual who earns very little, and therefore he would not demand the tax benefit to which he is entitled from the income tax authorities. If the process is implemented through the system of deductions by the employer, we will ensure that the tax benefit reaches its target, even it if is not demanded," Barzilai adds. One of the concerns about implementing the negative income tax stems from an attempt that was made decades ago, when child allowances were paid through the employers. A considerable number of employers did not pass on the funds to those entitled to them, and in the wake of that child allowance payments were transferred to the NII's responsibility. "We are familiar with the matter," Shalom said last week. "Our starting point is that most people in Israel are law-abiding citizens. There will always be offenders, and therefore the law includes a severe punishment. However, in order to understand the move, we need to see the structure of the labor market in Israel in its proper context. Most salaried workers in Israel are civil servants, employees of local authorities, government companies and large concerns, and it is ridiculous to think that the State of Israel would transgress its own laws. It is hard to picture a situation in which huge companies like El Al, Strauss Elite, Israel Aerospace Industries, the banks and the Israel Electric Corporation would break the law, and thus we would ensure than more than 90% of those entitled to the tax benefit would receive it. Regarding the rest, law enforcement authorities will know how to contend with the offenders," Shalom said.