Be a patriot. Have a beer in Eilat
"Where won't the businessmen Eliezer Fishman and Yitzhak Tshuva meet?" yuk-yukked TheMarker in a headline two years ago. Indeed, where? In the security situation lineup at the airport, that's where, because they own their own planes.
The article back them discussed the fairly new phenomenon of Israeli tycoons buying their own jets; how much it cost (them or their companies); and the excuses they used to justify the eye-popping extravagance. Only one excuse didn't win a mention in that piece: tax.
Buying a jet is one of the more remarkable ways the ultra-rich dodge tax. It is based on the fact that amortization on planes - distributing the cost of the purchase over years - is 33%. Meaning, the Income Tax Authority enables anybody owning a jet to record the entire cost of the purchase within three years. Since owning a plane is expensive, that means that anybody buying a plane can book costs amounting to millions, tens of millions, in their tax returns over three years.
This is how it works. You use a profitable company to buy a plane. For three years, you book heavy costs on buying the plane, that offset the profits. The upshot is no tax for three years.
What happens after three years? God is great and the world is infinite: exchange the plane for a new one, come up with a new tax dodge. Something will come up.
Behind this whole extraordinary dodge is that enormous 33% amortization rate for planes, as though the average lifetime of your average executive flying toy is three years. In practice it may last for decades. Thirty years is about right, not three, and amortization should last that long.
How did matters get this way? Amortization in Israel was accelerated by 10 times the true rate, because somewhere in the dim past of decades long gone, El Al wielded its clout in the political system and arranged this cozy tax benefit. Which is presently working magic for three Israeli airlines and a handful of the richest people in Israel.
What is the logic in a tax break that serves only the wealthiest people in the land? The same logic that underlies dozens of other loopholes and dodges in the tax law. There is in fact no logic or point, only brute power and contacts that achieve breaks for narrow-interest groups.
High on the hog in Eilat
Take the city of Eilat, which is exempt from VAT, costing the treasury NIS 400 million a year. The VAT exemption is the, but the, reason tourists go to Eilat and it's also why renting a hotel room is on the cheaper side, right? Er, they are cheaper, right?
Clearly the VAT exemption streams directly into the pockets of tourism, not heaven forfend - the pockets of Eilat's traders or hotels who simply use it to increase profit, gracious no, so clearly the exemption must be preserved for the sake of assuring the future of the Red Sea city.
By the same token one might argue that it is impossible to revoke the sales tax exemption on beer in Eilat, a 40% break on top of the 16.5% VAT break. Clearly the State of Israel has declared a high-priority goal to encourage beer consumption in Eilat. Surely it therefore checks that the full exemption is rolled over into lower beer prices in the desert-ensconced town.
The importance of encouraging beer consumption, particularly in Eilat, evidently surmounts other national interests such as tax parity, or simply paying true tax. Do not forget that people who have VAT exemptions generally have income tax exemptions too, of at least they behave as if they do: they simply don't file returns. Why bother, after all. Just look at the open fruit & veg markets.
Fruit and vegetables are VAT exempt, yet another stroke of genius resulting from a powerful lobby, in this case the agricultural one. So the stalls in Mahane Yehuda and Shuk Hacarmel and all the rest are free of the burden of filing VAT reports, and while about it, they exempt themselves from income tax too. Tax inspectors wouldn't dare set foot into the markets to explain the misunderstanding.
How many sector-based exemptions like this are there? Without checking, I'd bet, hundreds. Every pressure group, every lobby gets a personal tax break and once it's enacted into law, it's there to stay. Israel's tax system is a crazy quilt of patches and holes for the benefit of the well-connected at the expense of everybody else.