How the OECD rates Israel and vice versa

The OECD says the Israeli economy was performing well before the COVID-19 shock, but the pandemic is threatening to reverse Israel’s recent economic achievements.

Illustrative photo of Israeli money (photo credit: MARC ISRAEL SELLEM)
Illustrative photo of Israeli money
(photo credit: MARC ISRAEL SELLEM)
The OECD published a 144-page survey of the Israeli economy on September 23. What does the OECD think about Israel?
The OECD says the Israeli economy was performing well before the COVID-19 shock, but the pandemic is threatening to
reverse Israel’s recent economic achievements, raise poverty and exacerbate wide productivity disparities between the vibrant hi-tech sector and lagging “sheltered” sectors. Weak global demand will hold back export growth.
Quantitative easing (money printing) has helped liquidity but banks are heavily exposed to the real-estate sector.
What does the OECD think Israel should do?
The OECD says that additional reforms can improve the standard of living of the average Israeli citizen by some 15% by 2050 and help to reduce the gap in living standards vis-à-vis the upper half of the OECD countries. In brief, these reforms include:
• Strengthening schools, post-secondary education and retraining workers laid off. “The core subjects should be strengthened in the curriculum of the haredi [ultra-Orthodox] stream.”
• Providing additional social and infrastructure spending, necessitating spending efficiency and higher taxes.
• Establishing metropolitan transportation authorities.
• Providing higher compensation from wealthier to poorer municipalities.
• Recognizing that pollution is well above recommended levels and road traffic intensity is the highest in the OECD. Congestion charges and higher parking fees are recommended. Also, Israel should switch to renewable energy and split power distribution from power generation in order to create a wholesale energy market.
• Lowering pricing and import tax barriers to trade.
• Implementing recently agreed dairy reforms and expanding reform to other agricultural sectors. In particular, replace quotas, price guarantees and customs tariffs with direct payments to farmers.

What about tax?
The OECD recommends simplifying the tax system and reducing economic distortions. The tax mix is reasonably growth-and-employment friendly with a relatively low tax burden on labor. Nevertheless, ample room exists to simplify the tax system.
OECD proposals
• Give tax breaks for preferred tech enterprises and R&D grants that favor hi-tech. The OECD thinks a system of R&D tax credits require fewer administrative resources and “avoid picking winners.”
• Review the preferential tax treatment for preferred enterprises according to the OECD with a view to better targeting the scheme.
• The OECD says “the government should scrap the 10-year exemption for immigrants and returning residents on annual reporting of assets and income from abroad.” (Comment: it seems the OECD is proposing disclosure of income and assets, not tax payment on overseas income in the 10-year period, but the OECD would do well to clarify its intention.)
• Abolish the income tax exemption for residential rental income below NIS 5,100 per month.
• Continue to support upcoming OECD-backed international tax reform for digital operations and e-commerce.
• VAT exemptions for fruit and vegetables, tourism and Eilat, should be replaced with increased child allowances or “negative income tax.”
• The municipal property tax system (Arnona) is opaque but rates are currently higher for commercial than residential use, encouraging the assignment of land to commerce at the expense of housing. Rate differences and discounts should be restricted rates should be based on property values.
• Tax and social security collection procedures should be integrated.
• The Israeli Tax Authority (ITA) should spend more on IT and move to pre-filing of tax returns, by obtaining income data directly from employers, etc.
• The ITA should conduct regular taxpayer satisfaction surveys!
Israel has been a member of the OECD since 2010. This is worth celebrating as it emphasizes Israeli efforts to do better and circumvent trade boycotts.
The OECD steers clear of predicting how the Mideast normalization process might the economy.
The OECD reviews the economic situation of all member countries periodically. The OECD does not conjure its recommendations out of thin air, they are partly a wish list of government officials.
For example, abolishing tax breaks for immigrants, monthly rental income below NIS 5,100, and study funds are long-standing pipe dreams of ITA officials, but a non-starter among Israeli voters. Immigrants can always vote with their feet.
The OECD comments at length on the rich-poor gap in Israel and then presents several graphs showing a worse rich-poor gap in the USA.
It is hard to fault the Israeli government’s policy of “picking winners” in hi-tech and supporting them. In practice this is limited support for winning ideas that need time to develop before sales can begin. Other OECD studies have complimented the American and Israeli venture capital funds which do the main selection process, picking winners and pushing them forward using private investors’ money.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.