Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon agreed March 13 to devise a joint plan for cutting taxes. Earlier that same day, Intel announced its purchase of Mobileye, the Israeli leader in self-driving technology. Kahlon insisted a day later that the tax cutting has nothing to do with the Mobileye mega-deal and the expected tax windfall from it of at least 4 billion shekels ($1.09 billion) that will land in the state's coffers.
Indeed, the goverment's policy of pursuing tax cuts is hardly new. The proposed 2011-12 budget said the government would “continue to implement its multiyear tax plan, extended in 2009 until 2016.” In September 2015, the government also decided to reduce the Value Added Tax (VAT) from 18% to 17% and corporate taxes from 26.5% to 25%.
The tax cut policy is explained by the desire to stimulate economic growth. In accordance with neoliberal economic theory, in which Netanyahu avidly believes, easing the tax burden encourages foreigners to invest in Israel. It is also designed to prevent Israeli firms, such as Mobileye, from fleeing to tax havens and countries with lower tax rates. Mobileye’s success, however, as well as that of other high-tech Israeli firms that have paid billions in taxes and will continue to do so, proves that the tax burden in Israel is not so onerous.
Not only was Mobileye founded and developed in the Holy City of Jerusalem, but Intel decided that the company would continue to operate there and would even recruit additional local staff. As Kahlon said, the Mobileye deal and Intel's decision to keep the company in Israel surely have nothing to do with the government’s expected tax cut decision.
Israel does not have an economic growth problem. In fact, the economy is forecast to grow 3.25% this year, more than the Organization for Economic Co-operation and Development (OECD) average. Israel’s tax burden is also not excessive. It is ranked among the lowest third of the 34 OECD member states in terms of its tax-to-gross domestic product (GDP) ratio. Thus, any additional tax reduction is not expected to generate a significant change in the growth rate. On the other hand, it will lead to a significant revenue loss for the state. For example, a 1% cut in VAT would cost the state 6.5 billion shekels a year. Not only that, about one-half of adult Israelis do not pay income tax at all because their income is lower than the tax threshold.
Netanyahu’s pet neoliberal ideology would have it that all Israelis enjoy the fruit of accelerated growth, but the annual report issued in January by the Adva Center for Information on Equality and Social Justice finds that its touted trickle-down effect does not work in Israel’s case. If anything, the fruits of economic growth have continually trickled up more than down. The top 1%, or primarily the top 10th of the percentile, are the main beneficiaries of Israel’s periods of economic prosperity. During the 2003-07 economic upturn, the share of Israel’s national wealth belonging to the top percentile more than doubled, and that of the top 10th almost tripled. At the same time, the national wealth of 90% of the population shrank.
The top 1% of Israeli households own 5.2% of the national wealth, a share equal to that held by 70% of the population. The annual report on poverty and social gaps issued by the National Insurance Institute indicates that in 2015, almost every fifth family lived below the poverty line. Among the Arab population, that figure stood at 53.3%. Israel’s poverty rate is almost double the OECD average. The income of one of five Israelis aged 66 and above is below the poverty line. Almost one-third of the remaining 200,000 Holocaust survivors, some 65,000 elderly Israelis, receive government assistance, according to data from the Welfare Ministry and the Finance Ministry’s Holocaust Survivors Administration.
The economic model developed by the world-renowned American economist Robert Solow in his 1956 book “A Contribution to the Theory of Economic Growth” shows that in the long term, tax policy has no impact on growth rates. (The model was cited in a Knesset Research and Information Department study on the influence of tax levels on economic growth.) On the other hand, any rational person knows that in the long run, the highest-yielding public investment is in education. This would especially be true for a country ranked among the lowest third of OECD countries in terms of state expenditure per student. The grim outcome of Israel's low investment in education is reflected in its being ranked 40th by the Program for International Student Assessment based on student test scores in sciences and being ranked 39th in math.
The Adva Center argues that successive Israeli governments have not developed long-term plans to increase the number of students receiving high school diplomas, to increase the number of university students or to foster an all-inclusive “start-up nation.” Official expenditures by government and local authorities on services for citizens totaled 41.2% of GDP in 2014, similar to the rate in the countries of Eastern Europe and countries with a tradition of low government expenditure.
The state of the country’s public health care system is especially egregious. The number of hospital beds per capita — three to every 1,000 residents — positions Israel at the bottom of the OECD rankings. This is what led opposition leader and Zionist Camp Chairman Isaac Herzog to call on the government to invest surplus tax revenues in rehabilitating public health and welfare services.
The desire of Netanyahu and his colleagues on the economic right for tax reductions to leverage trickle-down growth is neither new nor surprising. This was their calling card in the 2015 election campaign as well. Kahlon, who is the leader of the social-welfare championing Kulanu Party and is considered a “socially minded finance minister,” is also the person who signed off on the following: “The theory of trickle-down growth, according to which growth will trickle down to the weak strata of society, has collapsed.” This is stated in Kulanu's economic platform. It also urges a “change in this approach, so that shrinking the gaps and inequality will bring about increased growth.”
There were some, this author included, who believed Kahlon and his friends in Kulanu (which in Hebrew means “all of us”) would provide a counterweight to the political, clerical and nationalist right. Sadly, they have turned out to be a featherweight not only in that respect, but also against the social-economic right as well. Still, the row that began March 15 between Netanyahu and Kahlon over when to launch the new public broadcasting corporation might reshape the balance of power between the two men. Netanyahu has hurt Kahlon’s ego and his image of heading a promising, socially oriented party. This disgrace could actually provoke Kahlon into re-adopting his own social-welfare policies.
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