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Summer 2000
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The Director's Column
By Dr. Alvin Rabushka
Director, Division for Economic Policy Research
Billions and Billions and Billions and Billions
The last episode of the Quarterly featured the "Great Israeli Tax Grab of 2000." This grab for more money, by a government that already confiscates a huge share of the taxpayers' income, includes a 25 percent tax on stock exchange capital gains, a uniform tax of up to 25 percent on all savings instruments, a 10 percent inheritance tax, drastically increased
tax-reporting requirements, and numerous other new taxes. Prime Minister Ehud Barak and Finance Minister Avraham Shohat justify the new taxes as an attempt to bring about social justice for workers at the expense of a few wealthy capitalists.
The Workers' Victory
It was the workers, the supposed beneficiaries of the tax grab, who immediately mobilized to fight it. The Labor Party's main constituents, members of the national Histadrut labor union, threatened an
open-ended national strike, even though new taxes on the rich were intended to provide the wherewithal to put more
take-home pay into the pockets of the workers. Under Histadrut's pressure, Shohat removed nine articles from the proposed tax reform in early July: new taxes on
continuing-education funds and planned cancellation of tax benefits for working women, shift workers, employers in Eilat, development towns, and the disabled, among others. Amir Peretz, Histadrut's
handle-bar mustachioed leader, praised Shohat for his efforts to "bring about equality between capital and workers" and described the Treasury's agreement to drop many of the new taxes as a "victory" for all the workers in Israel (meaning Histadrut members, not those who work for themselves or who have managed to save a little money to invest in the course of their lives).
Shohat had lost his struggle for a capital gains tax in 1994, when the late Prime Minister Yitzhak Rabin, at the last minute, decided against its implementation. Without Rabin's welcome intervention this time around, Shohat boasted in early July that he was "very proud of this reform even after the changes made [removal of new taxes to meet Histadrut's demands]....All of you [speaking to journalists] know the difficulties I had in 1994 trying to tax the stock market and other reforms; now it [the remaining new taxes on capital] will be an historic event."
Stay Tuned
On July 26 the government presented the revised tax proposals to the Knesset presidium. After it undergoes a first reading, it will be sent to the Knesset Finance Committee for deliberation, and possible modification. The Knesset goes into recess from early August until after the holidays in late October. Depending on the composition of the Israeli government at that time, which in turn depends on the status of the
so-called peace process, Shohat and Barak (assuming they are still in office) hope that the Knesset will enact into law what remains of the
Ben-Bassat Committee's recommendations by January 1, 2001. Stay tuned to find out what happens, which will be reported in the fall issue of the Quarterly.
Peace with Hundreds of Billions in Our Time
Barak and Shohat sought their legacy in new taxes on greedy capitalists. But these few billions of fresh Israeli taxes pale against the hundreds of billions at stake at the Camp David summit of July. The amount of money U.S. taxpayers would ship to the government of Israel, if a deal were reached, makes any new taxes or changes in current Israeli taxes downright
penny-ante. Estimates of fresh aid ranged between $50 billion and $150 billion, in addition to the annual $5 billion already dished out to the Israeli and Egyptian governments, which has totaled more than $250 billion, expressed in constant 1999 dollars, since aid began in earnest in 1974. Arafat learned from Israel to think big: His financial advisor suggested $40 billion for the new Palestinian state.
The cessation of talks on July 25 did not diminish Israel's pursuit of additional aid. The Wall Street Journal of July 26 reported that Israeli Defense Ministry officials want $20 billion in new money over 10 years for modernization, including $2 billion for cars and trucks.
President Clinton upped the ante in a half-hour interview with Israeli television on July 28. He said: "I will do my best to get the maximum amount of support." He even raised an issue that has never been on the aid menu: compensation to Jews who fled or were evicted from Arab lands since the creation of Israel. The promise to Arab refugees was $250,000 per family; Jews would have to get at least that much, or more. Assuming that a
half-million Israeli families or their descendants would be eligible, that new aid scheme would raise the cost of an
Israeli-Palestinian peace agreement to U.S. taxpayers by another $100 billion. No doubt the Israeli government would demand the right to administer this compensation.
Crush Freedom
What would happen to all these fresh billions that would pour into Israel and Palestine? Based on the evidence accumulated during the past
quarter-century, it will go right down the drain. It will be doled out in higher salaries for bureaucrats and larger subsidies for
money-losing, state-owned enterprises. By now you know the story we have been telling for the past decade. In the process, it will crush what little freedom exists inside Israel. Just to give one indication, three small political parties, comprising nine Knesset members, went on record on July 12 demanding $2.5 billion in government benefits as their price for entering a coalition with Barak's minority government.
Strike! Strike! Strike!
Barak will want to use tens of billions in new money to advance his political interests. But the Israeli people will not let him. As soon as the sums are announced, everyone will go on strike to get his cut, lest he be left out of the Great Israeli Aid Feast of 2000. Get it while the gettin's good!
Strikers will shut the schools, disrupt transportation (airport, railroads, ports, buses, taxis, trucks), close gasoline stations, disrupt telecommunications, interrupt water and electricity supplies, leave garbage to pile up on the streets, prevent patients from getting needed medical care. Name any sector and its workers will shut it down. The demands of Israeli workers will quickly eat up all the anticipated new money. Higher wages across the economy will erode export competitiveness and the domestic profitability of Israel's business sector. The government will then have to give additional subsidies to the country's monopolies and cartels to compensate them for higher labor costs.
As the Quarterly went to press, a peace deal had not yet been reached and billions in additional aid remained on hold. Stay tuned. If a deal is struck, you may wish to postpone your next visit to Israel until the strikes have died down.
But remember: Please don't drink the water!
