To reverse the cancerous policies today eating away at Israel's future and making a farce of its reputed independence, we must enact a comprehensive remedy to the major diseases of the Israeli economy: the addictive dependence on foreign charity, unfair taxing, and the suffocating bureaucratic encroachment on our freedom. These diseases and their cures will be given special attention in this document. They are spelled out in the sections of the Jubilee Plan which follow and are categorized by issue.

CUTTING GOVERNMENT FAT

The Jubilee Plan is a pro-growth plan that will encourage investment, create jobs and increase overall government revenue from tax shekels. Yet, the Jubilee Plan also has as its purpose reducing the size of government and increasing the freedom of ordinary Israelis.

The Jubilee Plan therefore eliminates grants and subsidies to industry, agriculture, various failed and anachronistic socialist institutions, export subsidies, transportation subsidies, and so forth, and sells land and state owned enterprises which will create revenue; some of this saved money and new revenue is earmarked to allow for tax reductions and other aspects of needed reform. Therefore, at this point, we will suggest "making up" for the "lost" free money once received in aid by slashing the bloated and completely unnecessary parts of the government which serve mostly to burden the Israeli citizen with bureaucracy, hit the taxpayer for more money, and provide jobs for some two dozen members of coalition parties.

What needs to be done:

The following ministries can be eliminated:

1. Communications: Will be downgraded to a Commission for allocating frequencies and coordination with neighboring countries.
2. Environment: Its functions and agencies will be attached to the Interior Ministry.
3. Energy and Infrastructure: The Defense Ministry will be responsible for the strategic fuel supply. The private sector will be responsible for energy exploration, R & D, marketing functions. The Finance Ministry will be responsible for the Electric Commission.
4. Housing and Construction: Land will be sold; markets deregulated, impediments to construction removed, financial assistance directed straight to the impoverished, and infrastructure construction assigned to the Public Works Department which will be transferred to the Interior Ministry, or renamed the National Highway Association and transferred to the Transport Ministry. Lighting, parks, playgrounds in new neighborhoods, road construction and maintenance are legitimate public sector activities and should continue within these different frameworks. Local municipal projects should be undertaken by the municipalities.
5. Immigration and Absorption: Border control will be transferred to the Interior Ministry, registrative functions to the Interior Ministry's Population Division, and the Jewish Agency or other philanthropic organizations will handle direct allocations of cash and services to needy immigrants.
6. Industry and Trade: Subsidies and bureaucratic promotion or blocking of businesses will end. Various functions of the Ministry will be transferred to private hands: trade and consumer associations, the Standards Institute.
7. Police: Will become a Department in the Justice Ministry.
8. Labor: The essential functions of this Ministry will be transferred to the Social Security Administration in the Finance Ministry.
9. Science: R & D will be carried out by the private sector; a National Science Foundation can function in the Prime Minister's Office.
10. Tourism: All state owned corporations will be sold. The Foreign Ministry will negotiate international agreements.
    In addition, savings will be made in the following ministries:
11. Education: Savings through the Jubilee education plan.
12. Religion: Savings through the education plan.
13. Agriculture: Savings through the privatization of Mekorot (National Water Carrier), ILA (Israel Lands Authority), the closing of Agrexco (Agricultural Export Corporation), Agridev (Agricultural Development Corporation), marketing boards, ending of reserves for price increases; also the private sector will be given the freedom to engage in agricultural activity, relieving the taxpayer of the burden created by government interference.

It is imperative that the relative size of the public sector be reduced. In addition to the elimination of unnecessary ministries, public sector hiring should be frozen. Only those positions opened by attrition will be filled. Any expansion in one department will require a corresponding cut somewhere else. Further, public sector wages should be frozen for several years. This will both save money and encourage a shift in employment from the public sector to business enterprises in the private sector.

Budget Policy

Reducing the budget deficit is a worthy goal. For years the government has financed its deficit either by raising taxes, borrowing money in the capital markets, or printing new money. But by raising taxes, the government reduces the incentives of individuals and business to work. By borrowing, the government competes with private borrowers, raises the rate of interest, and ultimately crowds out private borrowing. By printing money, the government fosters inflation, which in turn reduces investment by raising the risk premium on long term investment. All three methods suppress economic activity.

Hence, it is clear that while reducing the deficit is desirable, it should not be pursued to the detriment of economic growth. That would be self-defeating. Hence, deficit reduction should emerge as the natural result of reducing the government spending as a share of a faster-growing economy. Attempting to reduce the deficit through tax increases or increasing the money supply only makes matters worse.

At the same time, any single-minded attempt to reduce the deficit through spending cuts without enlarging the economy will only result in social and political confrontation that also will be self-defeating in the end. The only sure way to reduce the deficit is to expand the economy, which will, in turn, translate to higher revenues. As the economy is expanding, it will then become politically possible to curb the government’s appetite for spending to ensure that it does not perpetuate the budget deficit by consuming the additional revenues.

Much of government spending by its very nature constitutes a wasteful and inefficient use of resources, adding nothing to the nation's productive capacity. Huge transfer programs take money from one group of taxpayers and give it to another. Other government programs are politically determined projects with no economic justification, or are attempts by the governing elite to decide for the average citizen where and when to invest. Government spending as a whole represents an enormous burden for the private, productive sector of the economy. It thus impairs needed economic growth and deprives taxpayers of money that could be better spent supporting their families and investing in Israel's future.

Although budgets need not be balanced at all times, there are severe limits to the deficits that can be incurred with relative impunity. Governments and politicians must learn to say no to spending requests so that public spending as a share of the economy is kept at modest levels and larger deficits are not realized on a regular basis.

TAXES

The tax burden as a percent of the GDP has grown from 37.7% in 1991 to 40.5% in 1995 (est.). An average Israeli's tax burden has gone from 17.5% of his wages in 1991 to 21.5% in 1994. Recent tax "reductions" have been accompanied by other tax hikes and the creation of new taxes; such that many Israelis pay marginal rates of up to 60%. A 45% tax bracket applies at salaries of just over NIS 8000. The highest tax bracket, after which the government takes half of what you earn, applies at a mere NIS 14,700, what would be a middle income family in the United States. "Soak the rich" tax rates actually erode economic opportunities for lower and middle income workers.

High marginal tax rates affect economic output, as one would expect. Productivity and wages tend to rise when marginal tax rates are low, but productivity falls or rises very slowly when marginal income tax rates are high.

Since productivity is a primary engine of economic growth, high marginal rates serve only one purpose: they make Israel poorer.

High marginal tax rates are disincentives for foreign and domestic investment. Companies and individuals take their investment money to countries where they enjoy low rates or to areas of investment which are not taxed—the most popular being the black economy. Countries that want to attract investment usually compete in cutting taxes. Israel is not doing very well in this competition.

Most civil servants in the Ministry of Finance, and all but a handful of Israeli politicians, place the collection of revenue ahead of the freedom, prosperity and economic opportunity of ordinary Israelis. The national income is really understood to belong to the government. Money spent by government, not by individuals, is the fuel that keeps the anachronistic wheels of the country turning. The people get to keep only that share of their earnings that the politicians and bureaucrats think appropriate. The government is first and foremost concerned with maintaining public affluence, even if high taxation results in private squalor.

So, Israel's taxes, rather than generating more revenue for the government, scare investors out of Israel, discourage immigration from affluent countries, encourage tax evasion, discourage work and entrepreneurship, hike the cost of labor and therefore limit the number of new jobs being formed, and make Israeli industry less competitive on the world market.

Also, high taxes create businesses operated on the basis of obtaining politically motivated tax benefits, and a huge bureaucracy to administer a system so complicated no individual investor can possibly understand it without a bevy of tax lawyers at his side. This further decreases the competitiveness of small business which cannot support the lawyers and accountants needed to deal with the bureaucracy over the years.

What needs to be done: A very basic starting position is best taken: What tax system would one design if he were starting from the beginning? An ideal tax system should generate sufficient revenue to finance the limited, legitimate activities of government and maintain fiscal reserves, should remain neutral toward the internal cost/price structure and private investment decisions, should leave the poorest unaffected by direct taxation, should be simple and easy to comply with (and therefore inexpensive to administer) and should not be used to accomplish nonfiscal policy objectives better pursued through public expenditure programs.

The "Fair Tax," while based on the system in use today, would radically restructure that system. VAT would be retained and business and personal taxes would be fully integrated with a flat identical rate of 26% for both. This leads to a single global income tax, which is imposed on a broad tax base. All income is taxed only once, when it is produced, and the tax is withheld and transferred to the government at that point, along the lines that VAT is transferred today. All subsequent movements of that already taxed income are of no interest from the tax viewpoint.

The system is so simple it can fit on a tax-form seven lines long. Adoption of this system will substantially reduce the points of friction between the population and the tax authorities, and will create a tax structure which is efficient and conducive to investment and growth.

The plan also encourages work by lowering marginal tax rates. Today's high marginal rates discourage work by lowering take-home pay. When all direct taxes are considered, many Israelis face rates near 60%. Why should an employee put in overtime if the government takes more than half of each additional shekel he earns? The flat tax plan will encourage work and investment by reducing the top marginal rate from 60% to 26%.

The personal income tax will be paid beginning with the first shekel of income above NIS 1950 per month (at current value; the same tax exemption in place today).

The Fair Tax permits businesses to deduct all expenses at the time of purchase, and so replaces today's complicated depreciation schedules, which change on an almost annual basis, with simple neutral treatment for investment. Neither interest nor inventory will be taken into account for tax purposes.

The purpose of the Fair Tax is to collect revenue efficiently without distorting economic decisions or choking economic opportunity. This plan will unleash the talents and energies of Israeli employees and businesses and allow all Israelis, including those who take risks and become successful, to keep the fruits of their labor. The economic growth engendered by this plan will create opportunities for employees currently unemployed or trapped by the inability of their employers to pay higher wages.

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