Yair Lapid did well following the High Court of Justice ruling to establish clear, independent, and objective criteria defining eligibility for location-based tax breaks. The situation wherein these tax breaks are distributed based on the strength of mayors within their party’s power structure is completely and utterly unacceptable. However, if the new Minister of Finance wants to do justice and create benefits for the “middle class” and the “working man,” he would be well served to take the map, the criteria, and the tax breaks, and bury them. Forever.
First of all, for reasons unclear, the people of Israel tend to think that the single-mom in Netivot who works tirelessly as a cashier at the supermarket deserves these benefits. A brief reminder: in order to be eligible for tax breaks, one must reach the tax threshold. Some 80% of women, for example, do not reach the tax threshold. According to the Ministry of Finance and the Central Bureau of Statistics, only employees with income in the top 30% reach the tax threshold. Therefore, these funds will not reach the needy. The opposite is true. The benefits - which are real money, for all intents and purposes - are designated for the “urban rich.” Moreover, this is a fundamentally regressive benefit (whoever earns more, gets more), and, therefore, earners in the top 10% will receive more benefits than earners in the 10% below them, and so forth. This is a fundamentally unequal benefit that only serves to increase inequality. This is the main problem with similar initiatives as well, such as recognizing childcare expenses as tax deductible for working mothers (a proposal Lapid is pushing that could benefit rich mothers), or recognizing mortgage expenses (which would benefit rich young couples).
The second claim, in this context, no less misguided, is that even if this is an unequal policy, it will draw desirable demographics to poor cities, which will improve the quality of the cities’ populations in the long term. This is a myth. The Bank of Israel already looked into this and found that location-based tax breaks do not change urban demographics. It turns out, as logic would dictate, that people of means seek good physical infrastructures, good day care options, and good schools - not an extra net NIS 1000 in their income.
Almost every day, the Ministry of Finance claims that tax benefits (sweeping exemptions in extreme situations) are weakening the Israeli tax system. These benefits will reach NIS 46.6 billion this year, or 18% of projected government tax revenue for 2014. The Ministry of Finance is constantly talking about the need to broaden the tax base rather than raising the tax rates (so more citizens would pay taxes, as opposed to raising the taxes that are already in place). So it is really not clear why the Ministry of Finance insists on reviving anachronistic, unjust, and unequal tax benefits. The Ministry must act to cancel the tax benefits, and not to expand them.
The Ministry of Finance plans to budget NIS 800 million to NIS 1 billion, a significant amount, towards regional tax benefits. This, after cutting child benefits, and cancelling the individual income tax hike, and part of employer tax. If the Ministry of Finance has this money, it would be better to give it to the disadvantaged workers, regardless of where they live, and thus to address the number one problem in the Israeli workforce: low wages. This problem is expressed in the following statistic: half of Israeli employees earn less than NIS 6,541 per month, before taxes (the median income for 2012). How can we improve their lot? There is an excellent tool that earns widespread support among academicians and tax officials: a negative income tax (earned income tax credit).
According to Bank of Israel economists, raising the average grant by 45% per family, alongside a certain broadening of income brackets eligible for the grant, will rescue some 4.700 working families from poverty, will reduce poverty rates among working families by 0.28%, and will narrow the poverty gap among them by 0.5%. All this, at a cost of NIS 660 million, only two thirds the budget that Lapid plans to dedicate to location-based tax breaks. Hebrew University Professor Michel Strawczynski, who is considered an enthusiastic supporter of increasing the income grant, told “Globes” a few months ago that actualization rates in US were also around 50% until it was decided to significantly expand the grant. Then actualization rates reached 80%, said Strawczynski.
Published by Globes [online], Israel business news - www.globes-online.com - on January 29, 2014
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