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Quarterly Report
Spring 2000
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The Director's Column
By Dr. Alvin Rabushka
Director, Division for Economic Policy Research
The
Great Israeli Tax Grab of 2000: With Help From America
American
Jews act as if they are schizophrenic. They are among the most successful groups
of individuals in the U.S. market economy, excelling in business, finance, and
entrepreneurship. Yet these same businessmen overwhelmingly vote for Democrats,
the party of big government. They have enthusiastically supported an increase in
government taxing and spending at all levels in the U.S., from 10 percent of the
gross domestic product in 1930 to fully a third today. U.S. Jews have also
supported the establishment of a massive government regulatory apparatus, which
has further extended the reach of government into the lives of all individuals.
Nomenklatura
What's
worse, U.S. Jews and their friends in Congress have caused far greater damage to
individual freedom in Israel. Their greatest achievement in fostering socialism
has taken the form of supporting massive transfers of free money - more than one
hundred billion dollars in foreign aid and charity - to Israel. Free money has
enabled Israel's nomenklatura - its politicians, bureaucrats, monopolies, labor
unions, and intellectuals - to sustain a decrepit socialist system, which has
been abandoned throughout Asia and Central and Eastern Europe. In so doing, U.S.
Jews, who enjoy freedom on their home soil, connive with Israel's nomenklatura
to restrict the liberties of Jews in Israel. Israel's burgeoning, externally
oriented, high-tech sector poses the only real threat to Israeli socialism, and
the Israeli government is doing its best to curtail its influence. Its view of
high tech takes the form of billion-dollar subsidies at taxpayers' expense to
gigantic multinationals to bribe them to invest in Israel, while driving small,
home-grown high-tech firms abroad, all the while claiming that Israel is a great
place in which to invest - especially because of the high tech.
Ehud
Barak's Legacy
Every
national leader, in the fashion of the day, seems intent on his legacy. For both
Bill Clinton and Ehud Barak, that legacy (to be paid for by U.S. taxpayers) is
comprehensive peace in the Middle East. In earlier attempts to build his legacy,
Clinton failed miserably to establish national health care under federal
government control. In his quieter moments, he must feel cheated knowing that
Israel's government succeeded in that quest. It did so by imposing a 10 percent
tax on wages, thereby increasing the top income tax rate from 50 percent to 60
percent, to finance national health insurance. Clinton was compelled by a
Republican Congress to sign a major welfare reform measure, while Israel gets to
keeps its Swedish - and bolshevist - style welfare system. And even though
Clinton, by a single vote in Congress, got the 1993 increase in tax rates he so
eagerly sought (to punish the Republican wealthy), his efforts are about to pale
against the great Israeli tax grab of 2000. It is this increase in taxes on the
few successful middle-class Israelis who have managed to survive the tyranny of
their government that will constitute Ehud Barak's real legacy.
Barak's
legacy may also require a deal with Syria. The reason is that despite all the
hype about Israel's booming and zooming economy, the reality is one of an old-fashioned
socialist system that cannot survive without large infusions of unearned outside
money. If Barak and Clinton can cut a deal with Hafez El-Assad of Syria (or his
son, the heir apparent), they will ensure the transfer of additional tens of
billions of dollars from U.S. taxpayers to Barak.
Although
Barak's sought-after tax increases will further destroy what few individual
incentives remain in Israel, massive new chunks of foreign aid will provide the
wherewithal to prop up Israel's socialist system for as long as it takes the
government to pay for these chunks of money with chunks of territory. The
combination of new and higher taxes and tons of foreign aid will enable Barak
and Clinton to realize the Jewish socialist dream, thereby vindicating the
vision of generations of Jewish intellectuals.
The
Great Israeli Tax Grab of 2000
The
die of the Great 2000 Tax Grab was cast on April 3, 2000, when Prime Minister
Ehud Barak stated that he intends to impose tax on income from capital gains and
savings. First, some background. Last autumn, the prime minister and his finance
minister, Avraham Shohat, had earlier appointed a committee of five economics
professors, three past and present Treasury officials, and three professionals
from the insurance, accounting, and legal professions. Under the direction of
Avi Ben-Bassat, director-general of the Finance Ministry, the committee was
charged with proposing a sweeping reform in direct taxation.
Although
the report was released to the public on May 4, 2000, its main recommendations
began to surface as early as February. In addition to the prime minister's April
3 statement of support for taxes on previously exempt capital gains and other
savings, the finance minister, several committee members, the governor of the
Bank of Israel, and other members of Israel's nomenklatura openly supported new
and higher taxes, especially on capital.
Leftist
intellectuals and other members of Israel's political establishment have long
supported imposing taxes on capital gains and on savings. They favor higher
taxes on upper-income individuals, inasmuch as high-income individuals (except
those favored and subsidized by the state in exchange for political and
financial support) are an affront to their egalitarian, socialist vision and a
threat to their power. A previous attempt at taxing capital in January 1994 was
derailed when the late Prime Minister Yitzhak Rabin, in a moment of economic
sanity, and against the advice of the nomenklatura, blocked the imposition of a
capital gains tax on the Tel Aviv Stock Exchange just as it was going into
effect. Despite Rabin's last-minute show of good sense, frightened investors
stayed away from the TASE for the next few years.
Socialist
Internationale
Recall
that Prime Minister Barak was installed as vice-president of the Socialist
Internationale shortly after his election in May 1999. With his faithful
socialist companion Avraham Shohat, who strongly favored the capital gains tax
that Rabin ultimately overturned when Shohat was also Rabin's finance minister,
Barak is about to establish his legacy - restoring socialism to its rightful
place in the world. At the April 3, 2000, press conference, Barak set forth his
new tax agenda:
We will continue to act to boost competitiveness in the economy and institute a tax reform that will create a situation of less tax on labor, so that people who get up in the morning and work all day will bring home a larger share of their income, while, at the same time, a certain tax will be imposed on capital. This is in order to help reduce gaps between the poor and rich in Israel.
Before
enumerating the new tax measures, let's translate Barak's socialist rhetoric
into ordinary language. This is what he really said (perhaps he rehearsed this
speech when he was sworn in as vice-president of the Socialist Internationale):
I
know that “People who get up in the morning and work all day” are
unproductive, passing their days subtracting value (losing money) in inefficient
socialist enterprises (either state-owned or state-sanctioned monopolies). But,
hey, these are the voters who keep me and my friends in office and in control of
the system. They expect us to reward them with additional income. In marked
contrast, there are a small number of very successful entrepreneurs,
who work long hours to establish and build their own private businesses.
But it is important for me to convey to "the sheeple'' [Barak-speak for
``the sheep-like people whose votes I need''] that only “workers” get up in
the morning and work all day. The new class of high-tech entrepreneurs, earning
millions selling their companies to Americans and Europeans, are getting rich on
the backs of the workers and thus deserve to be punished with all kinds of new
taxes. The workers, including government bureaucrats and members of Histadrut's
labor unions (I sure wish they wouldn't strike every Monday and Thursday),
deserve higher take-home pay (but I know this is what I have to pay to get to
solve their problems so I can control this bunch.)
Everyone
knows they can't earn a decent living in our money-losing, state-owned
enterprises, since we must tax the workers heavily to support Israel's
big-government regime of subsidies for politically favored groups and
enterprises and its massive welfare state. If we impose a new tax on capital, we
can prevent the emergence of a new interest group that does not owe its
prosperity to us (the government and the bureaucracy and the foreign aid we
get). Unless we stop them, this new class might succeed in reducing the scope
and size of government and our control of it, thus creating a real free-market
economy. (I am using the new socialist buzzwords “reduce gaps between the poor
and rich” since the older Marxist concept of class conflict is outdated, and
the world will laugh at us if we invoke it here.) Since the Internet is creating
a “digital divide,” real socialists can rally behind me to “close the
gap.” God bless Bill Clinton and America's Jews.
* * *
Cheerleader
Shohat
It
is fitting that Shohat, the cheerleader for taxing capital income, held a press
conference in Jerusalem on May 1, better known as May Day, the official holiday
of the Socialist Internationale. Here are his words:
The
public should not be upset by the new taxes, since the heart of the reform is a
significant rise in the net pay of salaried employees. The reform will achieve
both economic and social justice. The justice is so obvious that I hope and
trust it will be approved by the Knesset....The price of the reform would be
paid by a small group of rich people.
[emphasis added]
The
tax reform, he said, would be crucial for the economy. Not all the Israeli
people are sheep waiting to be sheared. Since the formation of Ben-Bassat's
committee last fall, Israeli residents, with any money left not already taken in
taxes by the government, transferred $2.7 billion to overseas bank deposits. All
the talk about a new tax on the Tel Aviv Stock Exchange these past months has
effectively killed it: Daily turnover on just one Israeli Nasdaq firm,
Checkpoint Software, typically exceeds daily turnover of all shares on the TASE.
It is, as we will see, no accident that the Israeli government has set out to
kill its own stock exchange.
Barak's
Tax Reform Legacy
Here
are the recommendations of the tax reform committee:
*
Imposition of a 25 percent tax on stock exchange capital gains. (This eliminates
the last place in the Israeli economy in which someone who makes money actually
gets to keep it.)
*
Imposition of a uniform tax of up to 25 percent on all savings instruments,
including shekel deposits, provident funds, short-term loans, and debentures.
(The money grab knows no bounds.)
*
Reintroduction of an inheritance tax, beginning at 10 percent for an individual
with bequests exceeding about $500,000. On the death of one member of a married
family, the spouse will have to pay the 10 percent. (In the U.S., a spouse pays
no tax. Moreover, does anyone believe the rate will remain at a low 10 percent
for long?)
*
A requirement that investors in the capital markets in Israel and overseas,
including wage earners with income exceeding $125,000, provide detailed
reporting to the tax authorities. (This is the start of a massive increase in
reporting requirements with the goal of giving the tax authorities detailed
information on everyone's private life. The report recommends that the income
tax commissioner be immediately given the authority to require annual reporting
from specially designated groups noted for “particularly high tax evasion.”
This latter discretionary power makes the U.S. Internal Revenue Service look
like a friendly welcome wagon.)
*
Anyone owning over $12,000 in overseas assets, or having any overseas income,
must file a tax return. The expectation is that within 5 years the entire
population will be required to file tax returns.
*
Imposition of 25 percent tax on the sale of individual apartments, with a
lifetime exemption of about $125,000, and a 25 percent tax on apartment rentals
(which was canceled in the late 1980s to encourage the public to lease
apartments to new immigrants during the period of mass immigration in the early
1990s).
*
Miscellaneous other taxes on previously exempt fringe benefits.
Smash the Bosses!
The
language of the report, the finance minister, the prime minister, and other
members of the nomenklatura is terrifying. “Prevent evasion” is repeated
over and over again. More and more emphasis is placed on reporting, so that the
tax authorities ultimately acquire detailed knowledge of every individual's
private economic affairs. And for some, such as the internal security minister,
Shlomo Ben-Ami, the recommendations do not go far enough: He wants an extra 60
percent tax on the wealthy.
What
can we make of this? First is the obvious political ploy, giving Labor Party
constituents an increase in take-home pay. (These short-term beneficiaries are
oblivious of the long-run effects of “taxing capital and punishing the
wealthy.”) Workers of the world unite! Smash the bosses! The tried-and-true
Histadrut slogans of not too long ago are alive and well.
Second
is the assault on the new class of young, high-tech entrepreneurs. Under current
law, Israeli investors have to pay 35 percent capital gains tax on profits from
overseas investments, but no tax on Tel Aviv Stock Exchange (TASE) gains.
Because this tax reform has a political purpose in ensuring that the people who
have run the State, and now run it into the ground, do not lose control of it,
it is well to note the following.
On
the one hand, there is pressure from the new economy, high-tech types to approve
automatic dual listing on the TASE of Israeli firms traded on U.S. equity
markets. On the other hand, this “tax reform” is being passed to make
ironclad sure that the old boy network that helped elect Barak doesn't lose
control. And, to be sure, their anxiety is a real one. If the dual listing is
approved, and if the TASE were to remain free of tax, Israelis would quickly
shift their investments to new, high-tech start-ups from old-line conglomerates,
monopolies, and cartels that constitute the lion's share of market
capitalization of firms listed on the TASE. And in turn, if that were to happen,
young entrepreneurs, not beholden to the state, would grab the lion's share of
economic resources and gain greater political influence. Perhaps a whole new
political class of free-market advocates would threaten the nomenklatura's
stranglehold on the system. This must be stopped at all costs.
Taxing
capital income in Israel makes great sense in this context, even though it makes
no sense from an economic point of view. There is no economic school of thought
or any group of respectable economists, which claims that raising taxes on
capital stimulates growth. Indeed, the consensus of scholarly research is that
raising taxes on capital reduces its supply, lowers investment, and retards
growth and job creation. The direction of capital gains taxation in the U.S. in
the 1990s has been down, not up. The tragedy in all this is that it would be
impossible without the ideological, political, and financial support of U.S.
Jews. If I may, a Yiddish phrase is truly appropriate: Az
uch un vay tzu unzere yaarn.
Of
course there will be big political fights and strikes as each interest group
tries to protect its current benefit or exemption. But rest assured of one
thing: When the law is finally passed, Israelis will pay more in taxes, the
government will grow larger and more intrusive, and the political threat posed
to the nomenklatura by the burgeoning high-tech sector will be curtailed.
Postscript
During
the financial meltdown in Asia during the second half of 1998, Korea's massive
conglomerates, the chaebols, which had prospered on a steady diet of cheap loans
and a protected domestic market, brought the economy to the brink of national
bankruptcy. Productivity levels in Korea's domestically oriented economy are
only about half U.S. levels. Whereas the Korean government had failed in its
efforts during the past decade to reduce the importance of the chaebols, the
Internet looks poised to create the country's next economic miracle. Whereas the
economic crisis of 1998-1999 could not loosen the stranglehold of the chaebols,
the process seems to be underway courtesy of the Internet.
The
penultimate paragraph in the cover story entitled “Riding the Net” in the
March 23, 2000, issue of the Far Eastern
Economic Review reads as follows:
“The
single most important thing about the venture-capital craze is that it will
force the big companies to change,” says Ji Hong Min, executive director of
Goldman Sachs in Seoul. The rise of Kos-daq [Korean equivalent of Nasdaq] and
the birth of a venture-capital industry - Min estimates there are 130 venture
funds active in Korea - have removed the financing advantage that maintained the
chaebols as the emperors of the Korean economy. The government's efforts to
encourage small and medium-sized businesses and stop protecting big companies
have reduced the political influence of the chaebols. “As time goes by they
will have less and less influence,” says Thomas Yi, chief operating officer of
Lycos Korea, a joint venture between the U.S. portal company and Mirae, a Korean
maker of testing and handling equipment for semiconductors.
Here
is an intellectual exercise. Replace Korea with Israel. Replace chaebols with
politically favored monopolies and cartels that produce for the domestic market.
Replace the names of Korean high-tech firms with Israeli high-tech firms. Now do
you see why Barak, Shohat, and the rest of the Israeli nomenklatura are so
intent on imposing new taxes on capital and higher taxes on Israel's newly
minted Internet millionaires? Venture capital and the Internet are the real
threats to Israeli socialism.
By
imposing new and higher taxes on Israel's high-tech entrepreneurial class, the
nomenklatura hope to stay in power and continue to perfect the
socialist dream of both Israel's and America's Jewish intellectuals. And
with billions more from America, they may indeed for a few years more.