The News Behind The News
December 9, 1999
The Stock Market TaxA Reuter's news story appeared on November 3, 1999 with the following headline: "The Minister of Finance does not rule out imposing a tax on the stock market." According to the story, Avraham Beiga Shohat, the Minister of Finance, while describing the committee which he had established in order to formulate a plan for tax reform, stated as follows: "It is the responsibility of the committee to examine all sources of government revenue and taxes in Israel."
With regard to a tax on the stock market, he added, "Discussions of tax reform should examine every angle."
The stock market is the economy's most effective tool for privatization, reducing the size of government, reducing concentration of market power and encouraging private enterprise, investment and growth. Government intervention in the stock market through the imposition of a tax would slow down the privatization of government corporations (which is already moving at a snail's pace) and the effort to reduce the scale of government ownership. Furthermore, the ability of firms, especially small ones, to raise capital on the stock market, rather than depending on government grants, would be diminished. The result would be further concentration of market power in the economy.
Foreign investors are an important factor in economic development, growth and the reduction of unemployment. A tax on the stock market would divert foreign investors to untaxed capital markets. When a transactions tax was imposed on the capital market in Brazil, 60 percent of the trading activity moved to New York. In the case of Israel, some 60 percent of trading activity is already carried out in New York, even in the absence of a stock market tax.
Pension funds in Israel invest 98 percent of their funds in special bonds which are heavily subsidized by the government. In other Western countries institutional investors have 50-70 percent of their funds in the capital market. Even if it became legally possible for the pension funds to invest more of their funds in the capital market, a tax on the stock market would discourage them from doing so.
In reality, a capital gains tax on stocks is triple taxation. Corporate profits, including distributed corporate profits or dividends, are the basis for the value of stocks and the incentive for holding them. The rate of taxation on corporate profits is currently 36% and whenever those profits are distributed as dividends, the stock holders pay an additional 25% dividend tax on top of that. To say the least, a tax on the stock market already exists many times over.
On three occasions in the past, it was decided to impose a tax on the stock market. In June 1964, Pinhas Sapir, the Minister of Finance, imposed a tax on capital gains which applied to stock market profits at the rate of 20 percent. The low level of activity on the stock exchange at the time was reduced even further and thirteen months later, in July 1965, Pinhas Sapir was forced to withdraw the tax.
In 1982, Yoram Aridor, the Minister of Finance, imposed a transactions tax of 2 percent on the stock market. Two years later the harmful effect of the tax had become evident and the tax was cancelled.
On January 1, 1995, Avraham Beiga Shohat, the Minister of Finance, imposed a tax of 10 percent on the stock market. However, as a result of the fall in share prices, which even led to the closure of the stock market for a short period, the tax was cancelled on January 30, 1995.
The bitter experience with the taxation of the stock market proved what everyone connected to the stock exchange already knew: that taxing Israel's relatively already undesirable stock market, for whatever reason, means a death sentence for the one free capital market tool in Israel's statist market environment. The implications of such a tax reach much further than just the domestic Israeli stock market. Privatization, foreign investment, growth and many other factors would all be negatively affected by this move.
It seems that the present Minister of Finance, although burned once in his failed attempt to tax the stock market in early 1995, is willing to risk failure again all in the name of increasing government revenues and control of the economy.
This attempt, like the previous ones, is destined to fail. If the government really intends to encourage investment and growth and continue privatizing government corporations, then a tax on the stock market cannot be included as one of the measures for achieving these goals.
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