"Globes" interviewed three former Tax Authority officials about the tax aspects of the Trajtenberg recommendations: Eldad Noach, Amit Kriegel, and Moshe Mizrahi.
"This protest has brought about an amazing change in the way the public discusses financial matters," Adv. Moshe Mizrahi opened the discussion on a positive note. "The terminology that protest leaders are using, such as social rights, did not exist in the Ministry of Finance. I spent ten years there; I worked with a few different ministers, deputy ministers, and department heads and the accepted opinion there is much more right wing economically. The notions of social and democratic rights and social justice did not exist. So I say to the public unequivocally - continue yelling out about high prices, because this is affecting business people and the government, and this is what will bring about real change."
Does real change need to come from taxes, as the Trajtenberg committee recommendations claim?
Mizrachi: "I do not expect great strides from the Trajtenberg committee recommendations, because with all due respect, I don't think that a public committee with a gun to its head can make deep, serious changes in Israel when it has been this way for 40 years. We have identified an age-old failure, which has existed through all the Israeli governments. If the middle class cannot make ends meet, this means that something in the government's activity has been wrong for a long time, and this cannot be fixed by a committee that has been meeting for only three weeks."
Noach agrees: "Recently, people are crying out that changes in taxation will solve all of our problems, but how will they solve the problem? If we raise direct taxes and lower indirect taxes, then suddenly people will discover that they are going to work and paying 60% income tax. Then they will say, "Wait, how can that be? It doesn't pay for me to work." This game is very complex, with many checks and balances, and we must decide what our priorities are if we want to make a change. This cannot be done in three weeks."
Getting around the decree
However, Mizrahi did find something that Trajtenberg did correctly. "When I was managing the Tax Authority, we thought that the tax levels for companies, capital gains, dividends and interest rates should all be the same: 25%. Our opinion that the company tax level should be lowered was not accepted on the political level. We thought that tax levels needed to compete with capital gains taxes, but not be too low compared with the level of tax on business activity. But the government decided otherwise, against our opinion.
"Therefore, I think that the tax system should be amended, and that the company tax rate should be raised, as they are recommending should be done now. And I would not be surprised if they create a new tax bracket for extremely high income earners, but this will not solve all the problems of the Israeli public.
"You must understand that taxes will not solve everything. It is a correct tool, a powerful tool, but it will not solve all the problems the protest and the public have raised. Taxes are an efficient tool to implement economic policy, but in many cases, when they do not fit well with overall policy, they do not achieve their goal. Therefore, you can't start with the assumption that all the distortions can be fixed by altering taxation."
Kriegel, too, is not sure that the taxation recommendations made by the Trajtenberg committee are the answer. "It is tempting to say that taxation changes will solve everything. At first sight, it seems quick and efficient; the government decides to raise or lower rates by a percentage, and a law is passed. The problem is, the tax system is limited; it doesn't affect the poor, because poor people don’t pay direct taxes. It also doesn't affect the wealthy, because they have alternatives. They have capital and they can decide to invest it in Israel or overseas, and they are much more flexible than the middle class. Therefore, sometimes raising tax levels might not be the most economically sound decision, since it can have much wider ramifications."
Kriegel also said that taxing the wealthy, as the Trajtenberg committee recommends doing, by adding a special tax bracket, may not necessarily lead to the economic results that everyone expected. "To the best of our knowledge, the tax on the wealthy, those earning NIS 80-100,000 a month, is expected to bring in less than expected, or about NIS 100 million a year. Therefore, it appears to be helpful, but is not of much economic value. Likewise, it is likely that many high-income earners will find ways to circumvent the ruling."
In the past, lowering indirect taxes and VAT were considered - maybe they are the solution?
Mizrahi: "When indirect and direct taxes are equal, then something is awry, because indirect taxes are not progressive, and this system is not just. Indirect taxes need to be much lower, and we all know this. On the other hand, each percentage of VAT and direct tax is equivalent to NIS 4 billion, and cancelling it would dig a hole that would need to be filled somehow. In addition, from our past experience, the money that is saved does not reach the consumer. Many times it disappears on the way when it passes through the chains and the importers. Therefore, to go and say, "Let's drastically lower VAT rates is not realistic, and it won't happen."
Noach: Creative ways need to be used to increase the sources for state income from different forms of taxation, for example, by trying to: bring funds that are overseas back to Israel; increase tax collection; increase the size of the pie from unexpected sources."
Mizrahi: "Conservative estimates show that there is NIS 50 billion invested overseas that is not reported in Israel. Most of it is money that has been overseas for a long time, especially from inheritances - so this money should be found."
Noach, Kriegel and Mizrahi all agree with the approach that is accepted in many countries around the world, that information disclosure agreements should be signed. Noach: "There is a tendency today for countries to exchange information about bank deposits. This has not yet reached Israel, but it will. Work is being done on this issue, and it is possible to give temporarily grant tax amnesty to all those who bring their money back to Israel. This would add millions of shekels to state coffers."
Other solutions that the three tax experts suggest include: educating the public and reducing the black market. "It is important to understand that social justice includes social debts. The public must be educated and convinced to pay taxes, and not to work off the books; the black market must be fought."
Mizrahi does not see any problem with this. "Public servants' idealism might lessen with time, but I also don't like the idea of the tycoons against all the rest. First of all, the wealthy are not the economy's enemy. Moreover, the term tycoon is misleading. When we speak about tycoons, we are talking about two or three people, but we must understand that business people in Israel compose a whole sector that is very large, and is the backbone of our economy. Nochi Dankner and Yitzchak Tshuva are not the only ones holding up our economy. The 'non-tycoons' also deserve to receive tax advice and to pay as little as they legally can. These are the people we are talking about."
Published by Globes [online], Israel business news - www.globes-online.com - on September 27, 2011
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