Is there any evidence that past government spending has created productive jobs? We must acknowledge the failure of the government's historic approach to investments and job creation: disbursing taxpayer-financed Investment Center grants and subsidies to business. If these attempts to bribe investors into investing were effective Israel would be enjoying an investment boom with full employment. Subsidies are no substitute for an overall attractive business climate.
Government cash subsidies to business (R&D grants, payroll subsidies, marketing subsidies) represent a substantial flow of money to Israeli businesses. Excluding defense contracts and tax expenditures, in fact, the value of subsidies equals almost exactly the annual corporate tax revenues. So, corporate taxes are simply recycled subsidies—and this is obviously no way to run any business, much less an entire economy.
What needs to be done:
Since business firms today receive ECIL (Law for the Encouragement of Capital Investments) benefits which are in large measure wasted and even counterproductive, it would be much more efficient for the economy to cancel ECIL and lower the corporate tax rate instead, in accordance with the flat "Fair Tax" above.
Sound tax policy treats all business activity the same. Encouraging firms to gravitate towards certain regions necessarily opens the door to waste, fraud, abuse and corruption. No matter what system is designed it will always be exploited. The benefits will not accomplish their goals, and Israeli development towns are a perfect example. If the government chooses to encourage businesses or individuals to move to development towns it should invest in infrastructure—better transportation to such towns will bring them "closer" to the center of the country and location decisions would no longer be hindered by considerations of extreme travel time and costs.
Since 1970, the GDP per capita has gone up more than 300% in Hong Kong and only about 60% in Israel. That means that for the past quarter of a century, Hong Kong's residents have been getting ahead more than three times as fast as Israelis. Hong Kong's unemployment rate hovers around 2%. Israeli merchandise exports, excluding diamonds, make up about 20% of GDP; in Hong Kong, exports of goods are about 120% of GDP. Hong Kong's success in world markets is because it is a duty free port, lacking tariffs or quotas on imports. And Hong Kong's industries receive no protection by their government, but face the test of global competition.
Taxes are not the only destructive government activity. Government regulations impose massive burdens on business, and especially on small business. The saddest point is that the politicians and bureaucrats who enact these laws and regulations do not know what they cost the small businesses, the private sector, or the economy as a whole. Some regulations are necessary for the safety and health of the public. Others may not be necessary, or worth their cost.
Because of regulations, funds that might have been invested in new enterprises are instead spent on meeting governmental rules. Work hours spent waiting on line at national and municipal offices, filling out forms, haggling over requirements and negotiating financial arrangements are hours not spent producing goods and services. Not only does the government slow job creation by adding to the cost of hiring an employee, but also the taxes and regulatory burdens are passed on by businesses to the consumer, either as higher prices or poorer quality goods.
Special assistance programs to certain businesses introduce a labyrinth of exclusionary rules, some too rigid, some purposefully vague, all subject to negotiation with bureaucrats.
What needs to be done:
The policy necessary for encouraging small business creation is: Licensing authorities must issue a well-defined set of conditions that must be met to receive a license. If these conditions are met, the authority must grant prompt approval. The timing of approval should coincide with approvals given for acquisition of land, compliance with building codes, and health and safety regulations. Therefore, a law should be enacted stating that any request for a business license will be automatically approved within two weeks unless the licensing authorities demonstrate to the applicant in a clear manner that he has failed to meet the necessary legitimate health and safety regulations. Any refusal to grant a license must have attached the precise measures necessary to meet the regulations and any resubmission of an application must be processed in five working days.
Taxpayers should not have to subsidize money- losing, state-owned enterprises or suffer rude inefficient service which comes from state ownership of hundreds of firms in which the bureaucrats’ wishes or employee benefits come at the expense of the wishes of paying consumers.
The best solution to attracting foreign investment to Israel is the FPZ approach. The essential feature of the Free Processing Zone is the creation of an "island" or enclave within the host country in which domestic policies, such as bureaucratic procedures, taxation, licensing, regulation and other barriers to free trade do not apply. FPZs are industrial parks outside the customs jurisdiction and foreign exchange control of the country. Of course, environmental and security laws do apply. One FPZ is already planned for the Negev; others should be located in the Galilee and Jerusalem area. Financial services must be added to the business activity expected to be conducted in the zones.
The FPZ will provide an investors' paradise with high quality skilled labor combined with Israel's advantages in technological innovation, free of government bureaucracy and intervention. Suppliers and purchasers of raw materials and services to the Zone will create a boom for business enterprises throughout Israel. Wages and taxes paid by employees living in Israel will stimulate growth and save the government money now distributed in unemployment benefits. The balance of payments will improve as a result of the increased trade and export earnings.
The establishment of an FPZ is a pinpoint solution for an entire region. The best way to encourage domestic investment and spur the creation of small businesses, jobs and economy-wide growth will be to expand the FPZ concept to the entire country, turning all Israel into a high-growth investors' paradise.
At the core of the pension fund crisis are the seven Histadrut funds, with about 750,000 members. Collective agreements deprive employees of the freedom to choose where to save for their own retirement. The collective agreement also effectively eliminates competition in the pension field.
The Histadrut funds are in an actuarial deficit of billions of shekels. That means that in a few years, they will not be able to meet more than one-third of the pension payments they have promised. The deficit is a direct result of mismanagement, bad investments that border on the criminal, and the basing of pension payments on entitlements not covered by investments.
What needs to be done:
To prevent future deficits, there must be a correlation between individuals' contributions and their entitlements. If there is a balance at the individual level large deficits will not arise. Such a balance means that members of a fund have what amounts to a savings account in their name with that fund, and they have the freedom to transfer their account to any other fund they wish; this will ensure competitiveness in the pension fund industry.
As for the current deficit: If the government were to pay for it, the entire taxpaying public would in effect be paying for an agreement made between two private entities: the pension fund and its member.
A government transfer of taxpayer funds to solve the pension fund crisis should take the form of transfer payments to individual members based on a means test. Transfer payments of this sort may be necessary to prevent some people from starving, and they should be viewed as what they are: a form of welfare. In no case should a mismanaged fund be subsidized; and since under the new rules individuals will have what amount to their own savings accounts, support can be directed to the needy individuals themselves.
Government guarantees for fraudulent commitments made by the pension funds would be a terrifying waste of taxpayers' money and would reward criminal activity and inefficiency. Similarly, the government's promise to issue special interest rate bonds for the pension funds is a gift worth untold billions of shekels which Israeli citizens, the taxpayers, must pay for. Obviously these subsidies must stop; and if the individuals now faced with the loss of their pensions because of the current deficit are to be assisted, the funds must not come from raising taxes on the average Israeli.
The government currently intends to privatize NIS 6 billion worth of state owned enterprises by giving the public options for the purchase of shares in these corporations. Ultimately, what the government is giving with one hand it will take with its other in tax shekels to pay for the pension deficit. It would be better to cover part of the deficit by incorporating the SOEs into the balance sheets of the pension funds. The tax burden would not need to rise and privatization would be accomplished swiftly. Members of the funds would be able to transfer their "account" to any other fund (ensuring both individual freedom and a competitive market), meaning that the funds would effectively be managing the investments but the members would be the owners of the assets. Privatization in this case would mean transferring ownership of these SOEs from the government to the fund members.
There is another advantage to addressing the deficit in this way: The TASE (Tel Aviv Stock Exchange), which suffers from low tradability and a small number of players, would benefit from an infusion of shares and players who have a long-term perspective, via the pension funds.
But pension policy reform cannot stop here. It is scandalous that ministers, judges, and senior civil servants get 4% annual increases in their pensions allowing them to accumulate taxpayer financed pensions two or three times faster and larger than the taxpayers themselves, who see their own pensions grow by 2% a year. It is scandalous that the senior bureaucrats get their pensions as soon as they leave office, and at the age of 40, for the rest of their lives (that means an above average monthly salary, for life, at taxpayer expense), while all other Israelis must wait ten years, and begin getting pensions at 65.
Similarly, government budgeted pensions must end. These are in effect unlimited and unknown amounts of taxpayer gifts to retired high level bureaucrats. The country cannot afford to commit itself to spending these amounts of taxpayer shekels. An employee's worth should be expressed directly in his salary, not in sweetened pensions. And the budgetary pensions should end. The senior civil servants will have the same options for balanced private pension plans as the rest of the public.
Since the enactment of the National Health Law, Israel has gone from the frying pan into the fire on health policy. Not only has the health tax, nominally but not really differently from a huge hike in income tax, raised both the overall tax burden and the marginal tax rates for individuals, thus decreasing incentives to work and invest and depressing economic activity, but it also is not generating anywhere near enough revenue to cover the cost of health care, and the government is again subsidizing the health funds, again at taxpayer expense.
Failure is not incidental to the National Health Law; it is the very essence of the plan. Residents of Israel are no longer free to choose the health service they want. The government has decided for Israelis. The government says it knows best what the citizens’ needs are, and it will define them. Necessarily, the government's patronizing health basket contains the minimum of services—and so, with competition effectively outlawed, most Health Funds have downgraded the services they provide to the minimum, now charging extra, above and beyond the health tax, for services they once provided as part of efforts to attract members. In other words, Israelis are now paying more for less. And since the government is setting the basket and the tax it must also determine the prices; the current deficit therefore comes as no surprise.
What needs to be done:
A more efficient solution to the twin problems of encouraging proper health care and avoiding deficits would be for the government, if it has decided to assist in these matters, to extend direct financial assistance to the poor in the form of health vouchers. Funding the user rather than the provider of the service will cause the funders to improve their service while avoiding wasteful spending as they try to attract members, whether these members pay with cash or government-provided vouchers. This voucher system guarantees a competitive market and most importantly, the freedom of individuals to choose the health care they want.
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