Prime Minister Benjamin Netanyahu is feeling really good about himself. Strategically, he has accomplished all his goals: He has torpedoed every attempt to open negotiations with the Palestinians and continued massive construction in Jerusalem and the West Bank, making a mockery of U.S. President Barack Obama's objections. Recently, he even managed to mobilize the world to impose some sanctions on Iran.
Netanyahu can also boast of some economic achievements: Our economic situation is better than that of most Western countries. There is no debt crisis, growth is reasonable and unemployment is low.
Netanyahu and Finance Minister Yuval Steinitz also proved their fiscal responsibility last week, when they refused to bust the budget despite pressure from the protest movement and politicians who want to create a new economy from scratch, Greek-style. Even his insistence on not giving in to all the local authorities' demands was appropriate.
Last week, the government cut all the ministries' budgets and allocated the money it thereby saved to providing free education from the age of three and increasing the defense budget. That's the way to make a real change in priorities. So no wonder the credit-rating agencies aren't downgrading our rating, as they did only a few days ago to France, Austria, Spain, Italy, Portugal, Slovenia, Slovakia, Malta and Cyprus.
The decision not to bust the budget is especially commendable because it stood in clear contrast to the Bank of Israel's suggestion - which was to solve the problem of the defense budget by increasing expenditures and then raising taxes by an equivalent amount.
It is a pity that Bank of Israel Governor Stanley Fischer and other senior central bank executives didn't hear businessman Alfred Akirov, who last week told participants at an economic conference about how businesspeople, including Israelis, are now being courted all over the world. They are asked to come and set up businesses, build plants, and open hotels and shopping centers, and they are promised low taxes.
Akirov said that today, Netanyahu is doing exactly the opposite of what he did in 2003. "He realizes now as well that taxes shouldn't be raised, but he is doing it anyway, because it benefits him in the opinion polls ... Netanyahu started off in the right direction, but became a populist like [Labor Party leader Shelly] Yachimovich, who doesn't understand anything about economics," he said.
Akirov was referring to the cabinet's recent adoption of some of the Trajtenberg Committee's recommendations on socioeconomic reform. These included raising the marginal income tax rate to 48 percent, raising corporate tax to 25 percent and raising the tax on interest, dividends and capital gains to 25 percent, or 30 percent for substantial shareholders.
Akirov argued that these tax hikes would make businesspeople and entrepreneurs move their affairs overseas, "and that would create an intolerable situation, plunging the Israeli economy into recession and unemployment and hence leading to reduced tax collection ... Today it is no problem to move, say, a high-tech company anywhere in the world for tax purposes, because everything is in people's heads. To make companies come here from abroad, we must lower taxes, not raise them. Then there will be growth, and tax revenues will rise."
Akirov is quite right. In previous years, reducing taxes led to rapid growth and increased tax revenues, which enabled expansive investments in infrastructure, social issues and welfare.
But the sadder truth is that Netanyahu thinks exactly the same as Akirov does, but he is scared. He is afraid of the public's reaction in the next election, because today, it is popular to screw the rich, even though raising taxes screws us all.
Netanyahu was the one who reduced income tax and corporate tax in 2003 even though he faced huge pressure against the move (inter alia from the Bank of Israel, which has been wrong from start to finish ). And the fact is that these tax reductions produced a rapid 5 percent annual growth rate, a sharp reduction in unemployment and larger revenues for the treasury's coffers. So it doesn't make sense to do the exact opposite now and hope for the best.
It's true that Netanyahu now feels he is sitting pretty thanks to his "success" in sabotaging talks with the Palestinians. But this "success" will lead us to an intifada, war and disaster. So let him at least revoke the tax hike. That way, at least the economy will be stronger, with high growth and low unemployment.
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