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
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
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
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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