Sharing the burden

Maybe when Israelis see that big business is being forced to share the burden to ensure that the state remains strong, the bite of tax hikes will be easier to bear.

Lapid speaking at the Knesset 370 (photo credit: Marc Israel Sellem/The Jerusalem Post)
Lapid speaking at the Knesset 370
(photo credit: Marc Israel Sellem/The Jerusalem Post)
On Tuesday, the Finance Ministry provided details of proposed fiscal cuts and tax hikes to the government.
And, as is the case whenever “austerity measures” are adopted to fight out-of-control fiscal spending, the poor and the middle class will be the hardest hit.
From an across-the-board 11.5 percentage point rise in income taxes for all tax brackets – from the lower class to the upper class to a one percentage point hike in value added- tax to 18 percent; from a cut in the budget for dental care to children under 12 to a cut in child allowances; from annulling the subsidy for afternoon childcare for children aged three to nine to a hike in parents’ payment for “free education.” And we must not forget a brand new health tax on housewives.
All of these measures will hit the poor disproportionately hard and the middle class will find making ends meet increasingly difficult. Making the situation all the more intolerable is the fact that these proposed cuts and tax hikes comes just days after the revelation that many of Israel’s largest and most profitable businesses hardly pay any taxes at all.
A Finance Ministry report released this week based on 2010 data showed that four huge corporations – Teva Pharmaceutical Industries, Intel Israel, Israel Chemicals and Check Point – paid an effective tax rate of just 3.3% while smaller businesses paid a corporate tax of between 13% and 20%. Indeed, these four companies received a whopping 70% of the NIS 5.6 billion in tax exemptions under the law for encouraging capital investment.
The same Finance Ministry report also noted that corporate tax breaks rose from NIS 2.3b. in 2003 to NIS 5.6b.
in 2010. In 2011, a minimum corporate tax was instituted (Amendment 68) that eliminated some of the distortions in our tax system. But at the same time, it grandfathered in prior tax benefits. Also, in 2011, the corporate tax rate for “export firms” (business that export at least 25% of goods and services) dropped to 15% for companies located in central Israel and 10% for companies in the periphery.
And in 2013 the rates dropped further – to 12.5% and 7% respectively.
Many Israelis are rightly asking themselves why big business is not sharing the burden. Why must they pay so many direct and indirect taxes while the largest corporations headed by executives that earn some of the highest salaries in the country enjoy such generous tax benefits? Why does someone earning between NIS 9,011 and NIS 14,000 a month pay an income tax of 21% (22.5% after the new tax hike goes into effect in January) – not including a health tax and payments to National Insurance – while big corporations pay an effective tax of just 3.3%? Additional questions could be asked. For instance, why do companies like Teva, Check Point, Intel Israel and Israel Chemicals remain in Israel instead of relocating to, say, India? Is it solely because of the Jewish state’s low corporate tax rate? Don’t these firms enjoy Israel’s abundant resources whether natural (Israel Chemicals, via the Dead Sea Works, takes advantage of huge Potash reserves) or human (Teva, Checkpoint and Intel enjoy highly educated, innovative manpower)? Don’t they profit from the benefits of Israel’s basically law-abiding society, courts, law enforcement and military that help ensure business contracts and property rights are respected and overall security is maintained? Do they not benefit from Israel’s roads, its land and sea transportation routes and its telecommunication infrastructure which facilitate the transfer of goods and services? Do these firms not also reap the benefits from a fairly stable political system, democratic institutions and responsible economic planning? That’s why international firms seek out Israel as an attractive country in which to do business. But these corporations should return the favor by paying a reasonable corporate tax.
Obviously, we cannot expect the CFOs of these firms or their shareholders to volunteer to pay a reasonable level of corporate taxes as long as they are given the option of paying hardly any corporate taxes at all. Therefore, the discriminatory and distorted aspects of our tax system need to be replaced with a clearer, simpler and fairer tax code.
And these changes must be made immediately, as part of the 2013-2014 fiscal budget and accompanying legislation.
Perhaps when Israelis see that big business is also being forced to share the burden to ensure that the State of Israel remains strong, the bite of tax hikes and budget cuts will be a little easier to bear.