HIGHER TAXES AND SPENDING SET TO CURTAIL ISRAELI ECONOMIC GROWTH
While the media is preoccupied with Israeli PM Benjamin Netanyahu’s last minute, pull a rabbit out of the hat, national unity government, the more important news was made by a nameless finance ministry official. I am not one to say I told you so, but I told you so! About 6 months ago I wrote a column about the negative economic impact of last summer’s tent protestors and the resulting Trajtenberg legislation.
In “Power + Populism = Plunging local stock market? ” I wrote, “While supporters of the capital-gains tax increase say that this will increase revenues to the government that it can then spend on a host of social issues, the data shows that revenues will drop. In a ground-breaking paper published by the Adam Smith Institute titled “The Effect of Capital Gains Tax Rises on Revenues,” over 50 years of data was collected and it showed that increases in capital gains tax rates actually lowered the revenues that governments took in. The paper is a must-read for those interested in the issue (too bad the Finance Ministry missed it!).” I went on to mention some data points relating to the US economy that proved how higher capital gains taxes produced lower revenues, and how a cut in capital gains tax produced surging revenue.
Well voila. According to a recent Globes article, “Capital gains tax revenues on Tel Aviv Stock Exchange (TASE) transactions totaled in April to NIS 203 million, 12.8% less than in April 2011, after the government raised the capital gains tax to 25% from 20%.”
Revenue shortfall
It’s no secret that as a result of last year’s tax hike—in order to pay for ‘free’ pre-school education among other goodies —the economy has suffered. Not only have government revenues dropped, but foreign investors bolted, and the Tel Aviv Stock Exchange has underperformed. Israeli companies are gun-shy about investing and hiring because they are afraid higher taxes and more regulation are coming down the pike. Perhaps their feelings are justified.
In another Globes article we read of Israel’s large budget shortfall and the proposed solution of higher income, capital gains and VAT taxes, coupled with budget cuts. “A very senior source in the Israel Tax Authority told “Globes” today that the budget deficit is likely to hit NIS 36 billion in 2012 – double the NIS 18.4 billion planned in the biennial budget – amounting to 4% of GDP. It is possible to exceed the target, but not by this extent,” said a top official. “The government must decide on tax hikes this year, but this time it will not be enough to raise taxes on cigarettes and beer. This is not the time to simply plug leaks. It’s necessary to begin thinking about the big things, such as raising VAT or income taxes.” The report continues, “The Tax Authority estimate that raising VAT by one percentage point will add NIS 4 billion in tax revenues a year, and raising income tax brackets by one percentage point will add another NIS 700 million. The Tax Authority does not rule out a surtax of 2% on capital gains and high income earners, which would generate a further NIS 500 million.” If you need professional help, get the services mentioned on this site: https://www.cfoacc.com.sg/accounting/nominee-director-singapore.
A ruse?
I’ll deal with the idiocy of the tax hikes in a minute. But in theory the budget cuts should be a good thing, but for some reason the media, led by Labor party leader Shelly Yachimovich are painting a dire picture of the chaos to follow spending cuts. Humm. According to figures presented by Governor of the Bank of Israel Prof. Stanley Fischer last week, the government faces a NIS 6.6 billion budget shortfall. Now 6 billion Shekel seems like a lot but we are talking about a budget that is over 315 billion NIS. That’s 2%. We can’t find 2% of budget waste that can be cut? But that’s not the half of it. It turns out that, citing the same Globes article, “The 2012 budget calls for a 4.9% increase in government spending compared with 2011.” That means spending will spike almost 5% this year, but we can’t cut 2% next year. Give me a break.
We have empirical evidence that tax hikes not only stifle government revenue growth, but they kill economic growth. No society has ever been taxed into prosperity. As we see France and Greece embrace Socialist leaders, that many analysts believe will lead both economies into the abyss, why on earth do Israeli leaders, especially the PM who espouses a belief in capitalism, want to follow suit?
Investors in the TASE beware; we could be in a prolonged period of stock market underperformance.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, SIFMA. For more information, call (02) 624-0995, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
