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Israeli Capitalism With a Human Face
by Ariel Natan Pasko
30 March 2003

If some half-baked 'Thatcherite' program is implemented without serious thought -- like is currently planned -- then the masses of growing poor will probably still feel that, "Capitalism has a bad name in Israel."



The first thing I want to state is, "No one should ever accuse me of being anything but a free-marketeer." For years I've called on Israel to 'get off the dole' of aid money from America. True, part of the money comes in military grants that also help American industry. True, that the Americans benefit from the research and development relationship with Israel.  True, part of the money is in loan guarantees, and Israel has never defaulted. And, also true that Israel as a friend and ally on the front lines, in the Middle East; first against the Soviets and now in the War on Terror, devotes an undue amount of its government budget toward defense spending. But in the long run, prolonging a subsidization of poor economic policy -- even though it accounts for no more than 3% of the Gross National Product -- hurts Israel.

At a major economic conference in 1988 -- before the elections -- I spoke with the head of the Manufacturers Association and the head of a prominent free-market think-tank in Israel about starting a new political party, "The Capitalist Party." This new party, I said, should not take a position on the war-peace issue, the religious-secular issue, but single-mindedly focus on reforming the structure of the economy, tax reduction and capital market reform, encourage entrepreneurship, the whole nine yards. Both concurred that it was a worthy endeavor. But both warned me, "You have to change the name. Capitalism has a bad name in Israel." That about says it all and with that said let me continue.

Therefore, I'm generally in favor of the attempt by Finance Minister Netanyahu and the Israeli government to reform the economy. It should be obvious to all by now that it's way overdue. But, it must be capitalism with a human face. That is, it must be done with a concern not to further impoverish the weaker sectors, in the name of progress. It must open up opportunity at the same time that it reduces the government budget.

There are too many parts to a complete economic reform program, to discuss in a forum such as this, an article. So I will limit it to five. Restructuring Kitzvat Yeladim -- Child Allowances, Havtachat Hachnasa -- Low Income Supplements, and the Bituach Leumi -- National Insurance Institute -- payment tax, reducing Income Taxes, and encouraging entrepreneurism and employment opportunities.

At the same time that -- according to the new plan being put forward by FM Netanyahu - large families are losing much of their Child Allowance monies from the National Insurance Institute, there is a need for new economic opportunities to be opening up, so that we don't exacerbate an already dire situation. I've heard some say, "we'll force them to work." Where are the jobs? Many people have talked about the importance of reducing the large-family benefits. They say, "It's not fair. Every child should receive the same amount." Well in case you didn't notice, a family of eight -- six children -- losing about 1,800 shekels from Child Allowance funds, reduced to living on 6,000-8,000 shekels/month, does not equal a family of four -- two children -- living on 6,000-8,000 shekels/month. Equalizing payments to 144 shekels/month per child will not treat everyone equally. It disproportionately hurts the already poorer. 

Israel needs to rethink this 'Israeli' idea of treating everyone 'equal'. Treating unequal people equally, giving them both the same thing when they need different things, mistreats someone. The goal should be, 'Equality of Opportunity' not 'Equality of Outcome.'

To help cut the budget, why not just do away with Child Allowance on the first two children altogether. As anyone who has raised children knows, in the first few years, they really don't cost that much to take care of. Even young couples at the lower end wouldn't be hurt too much. Child Allowances could kick-in with the third child and there should be a maximum income level of 10,000-12,000 shekels/month; any family making more than that simply doesn't receive any payments. Child Allowances could also be gauged toward age, that is, they first start after a child reaches say, four or six.  The payment level could even rise at a later age when children do cost more, i.e. teenagers. Does it make sense that someone like FM Netanyahu - making what, about 35,000 shekels/month, should receive Child Allowance -- about 300 shekels/month -- for his two kids? If Netanyahu lost his Child Allowance money, would it hurt him as much as the loss to an average larger family?

Many poorer families are living on the extra money from Child Allowance. Why should the national purse be supplementing wealthier people? If you're making 30,000 shekels/month, you're probably using the money for better vacations, fancier housing, new transportation, other consumer durables, or putting the money in a college fund. While some people use the money for food, others plan the success of their future generations, or indulge in conspicuous consumption. Is that fair? No, that will help perpetuate the poverty and class differences. 

Right now, the maximum income level to pay National Insurance Tax on is 35,000 shekels/month. Why? Why not raise it to 100,000 shekels/month or more? By the way, with the recent reports of the excessive salaries of many heads of government companies -- i.e. the Electric Corporation -- and other public employees, it would bring a bit of 'justice' to the situation. I didn't realize that people making 50-100,000 shekels/month would 'suffer' paying a few thousand shekels more. It certainly won't take food out of their mouths or adversely affect their children.

Today Israel is in second place globally -- behind only the United States -- in income disparity. That is the gap between the poorest and richest sectors of society. But there's a major difference. Israel has a small stagnant economy with almost 11% unemployment, and the US has a very large economy, slow but growing, with no more than 6% unemployed. Entrepreneurial opportunities at all levels abound in America. When thinking of trying to open a business, no one worries about the Internal Revenue Service, the way people in Israel are concerned about Mas HaChnasa -- the Income Tax Authority. An entrepreneurial spirit pervades America, even Jews do fine there, so why is there such problems in Israel?

It's the residue of what I call the 'Socialist Mentality.'  On one hand, the expectation that 'big brother government' will take care of you. An all-pervading attitude that everyone be treated equally, that leads to great social and market distortions. And on the other hand, a kind of distrust of business and businessmen, especially on the part of certain areas of government, like the Tax Authority. "Capitalism has a bad name in Israel," they told me, and they were the business people and free-market pushers.

I heard the latest plan is to reduce income tax. Great!!! But if you look closely, the lower half of the pyramid isn't receiving much 'tax relief.'  What can you do with an extra 150-300 shekels/month? Buy stocks? Start a business? While the richer half, those making 15-25,000 shekels/month and more, get substantially larger tax breaks and richer. One could argue that those wealthier, know what to do with their money. Well if you mean how to spend it on themselves, fine.  I heard that the top tax bracket is to be reduced from 52% to 35%, and I'm very happy. But, I would be happier if at least some if not most of that extra money in the pockets of the already wealthy, would need -- by law -- to be invested in productive enterprises; investments that would expand employment, or charitable contributions that would lessen the burdens of government. That could compensate for the government rolling back the social welfare net. How are Netanyahu and his cronies going to be sure that it won't just be spent overseas on expensive vacations? He can't, and doesn't care about that and that's what's wrong with how they're 'reforming' the economy. The reforms need to be capitalism with a human face.

One of the areas of reform is to reduce the period for Unemployment Benefits and tighten the rules on Low Income Supplementation Benefits. "Let's catch those Welfare cheats!" Well how about workfare? It's done well in the United States. Right now, when unemployed, there is little incentive to find a job or create your own in Israel. The rules actually discourage you from taking a low paying job, and combined with the Tax Authorities 'assumption you're cheating' until proven otherwise, downright forces you not to try and start your own business. But why throw people off the dole, into destitution? Let them start working part-time, or at a low paying job, or trying to get a business off the ground, while still collecting something to live on. If they get past their difficulties, then everyone will be better off.

Why do you think there is so much tax fraud in Israel? Maybe, because of the excessively high tax rate and the assumption of cheating by the tax authorities, which leads one to 'protect' himself by skimming. Just in case he's called in for an audit, the Israeli has some money put away for the immorally high fines charged on such skimpy evidence. What if Income Tax were simplified and reduced to only two tiers, 10% and 20% across the board, with major deductions for socially positive charitable contributions, really stiff penalties for cheating, and transparency in the rules and procedures of the Income Tax Authority? With real transparency, the trust of the people would be restored, trust that the taxman is applying the rules fairly and equally to all, trust that there's no 'cheating' on the part of the authorities. Bring back trust and it will lead to a flourishing of new enterprise start-ups.

Which leads to the last issue, cutting the size of public sector employment, a very worthy goal. FM Netanyahu has enlightened us with his analogy of the 45 kg man trying to carry the 55 kg man. He has told us that the public sector accounts for 55% of GNP. Everyone knows that such a situation can't continue. Layoffs and early retirements are on the board. But, again we have a massive unemployment problem already. What is the government doing to encourage entrepreneurship and employment opportunities.

Cutting jobs in general is fine, but one area that needs to be done very carefully is in Education. I have personal experience in this area due to my children muddling through the Israeli educational system, and my wife teaching in it. Across the board cuts, or just plain early retirement won't do. They're into education over there in the Education Ministry right? So let them develop testing methods and evaluating systems to weed out the dead wood. There are a lot of poor quality teachers, notice I didn't call them educators, in Israeli schools. Bust the Histadrut -- the Labor Union -- and get teachers fired for incompetency. Kiviyut -- the Israeli version of tenure -- should only come after working five years, and only after you've proven that you're a competent teacher who cares about educating the next generation. After five years, the Education Ministry should be able to tell if someone is going to succeed as a teacher. If not, get them out of there. An educational free-market should be encouraged to develop. Regulations on opening schools should be loosened. Competition in education should prevail. Getting a good education is the best guarantee that the weaker sectors will be able to raise themselves up. Education is the key to Israel's success in the 21st century global economy.

Developing a system of retraining for the newly and long-term unemployed is crucial. With many labor intensive jobs having left or leaving the country, the hi-tech downturn, and now planed public sector cuts; some combination of government sponsored programs through the Labor Ministry (they're supposed to be working right?), vouchers -- for use in private retraining -- from the National Insurance Institute, and serious encouragement for the growth of a private sector retraining industry, on a massive scale, is mandatory! And that retraining should emphasize entrepreneurism as well as the new skills being taught. Israelis should no longer expect 'big brother government' to take care of their futures. A safety yes, a free ride no!

Jews have always done well economically throughout their history; there is no reason that in the Jewish State it should be any different. If we don't help provide the tools to people to pull themselves up, they might just pull us down; maybe we should even give them a hand up. If some half-baked 'Thatcherite' program is implemented without serious thought -- like is currently planned -- then the masses of growing poor, will probably still feel that, "Capitalism has a bad name in Israel." It might even lead to a neo-socialist backlash that would set back the cause of economic liberalization in Israel a generation or more. That would only put us on the highway toward third-world status. We as a society cannot suffer pockets of great wealth and pockets of great poverty -- labeled Capitalism -- or the 'Neo-Socialist Workers Paradise' of total equality and no growth.

But a well thought out and balanced program of tax cuts, budget reductions, capital market reforms, deregulation, monopoly busting, increased labor mobility, retraining for the 21st century economy, and encouragement of the non-profit social welfare sector to take over where government leaves off; true economic freedom, that is, capitalism with a human face, could transform the Israeli economy into a dynamic, robust, vibrant one. It would become an Israeli economy and society that pulls Aliya -- immigration -- like a magnet, not only from the lands of despair and danger, but also from the lands of prosperity, such as Europe, South Africa, Australia, and America. Imagine what a million well educated -- and free-market oriented -- American Jews could do for Israel?

Policies like these, in harmony with our long held Jewish traditions of Tzedakah -- righteousness, charity -- and concern for the poor and weak; combined with the equally long held Jewish tradition of entrepreneurial spirit, could lead Israel toward her goals of prosperity and fulfillment. It would be an Israeli capitalism with a human face.     

Ariel Natan Pasko is an independent analyst & consultant. He has a Master's Degree in International Relations & Policy Analysis.  His articles appear regularly on numerous news/views and think-tank websites, in newspapers, and can be read at:  www.geocities.com/ariel_natan_pasko.

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