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Sam Bronfeld, the general manager of the Tel Aviv Stock Exchange, can relax.

So can Nochi Dankner, Yitzhak Tshuva, the Borovich family, and all the rest of the stock market barons.

The managers of Israel's institutional investors can sit back and wink at one another - it looks like everything will work out.

And they can all chip in to buy a nice bouquet for that gaggle of bureaucrats at the Finance Ministry's Income Tax offices, who discovered to their astonishment, two months before the great Capital Market Tax Reform, that they were completely, entirely and frankly unprepared.

Why Netanyahu folded

If the joke hadn't been on us, and we didn't have to pay the price, we'd laugh.

A year ago, the Finance Ministry decided to postpone implementing tax parity. Investors still pay 15 percent tax on domestic investments and 35 percent on foreign security investments. The official reason for delaying parity at 15 percent was to give the capital market time "to prepare itself" for the great revolution, which would gradually lead to billions of dollars leaving Israel for better investments outside.

The real reason: tremendous pressure by the stock market and banks, which wanted at least another year of shelter under the umbrella of unequal tax, another year of delaying direct competition with the world markets over the hearts and wallets of the Israeli investor.

Benjamin Netanyahu had good reason to succumb to the pressures. At the end of 2003, the Tel Aviv Stock Exchange was climbing onward and upward. He was only to happy to top his list of achievements with leaping share prices. Furling the umbrella could well have stopped the surge in its tracks.

That is also why we decided to check whether the finance minister really was committed to tax reform as the January 1, 2005 deadline approached. We received a clear-cut answer: the reform will be carried out in full and on time, and the treasury will not bow to pressure.

But conversations last week between Haaretz writers and capital market leaders and tax experts revealed a completely different picture. Netanyahu's tax people, headed by Eitan Rub, were fast asleep on the job. They had not done their homework. It was entirely likely that a good half of the reform and maybe more would be ruined, emasculated, fudged, deferred to a later date.

Why? Because under current tax law, some foreign bonds and investment funds are not defined as securities. Why? Because they are not traded on open trading floors but via computerized systems.

Didn't the Income Tax Authority know that a year ago? Two years ago? Three? Why did they notice it only this week?

Conspiracy buffs are no doubt bellowing that the Finance Ministry wanted to emasculate its own reform through technicalities. The ministry deliberately left the problems unsolved to avoid having to implement the reform, which was supposed to wrest open the domestic marketplace and expose it to competition.

Business as usual

A more realistic theory would suggest that it was the usual Israeli standard of bedlam. Nobody took the slightest interest in the reform, nobody did his homework, and nobody actually had the job of making sure that all reforms would happen as planned.

As usual, nobody is being held accountable. Joseph Bachar will say it's all Eitan Rub's fault, Rub will say he inherited the snafu from his predecessor, Tali Yaron-Eldar; Oskar Abu-Razek, the deputy tax commissioner, refers us to his deputy, Yuval Cohen, who's about to leave the tax department. Nobody at the ITA has anything useful to add or say, we learned.

Make no mistake: the freedom to invest in foreign bonds and mutual funds is a key part of the tax parity reform.

The ability to invest in foreign stocks such as Cisco, Microsoft or GE may be sexier, but with all due respect, what the big investors want is fixed-income securities. And what the man in the street wants is the opportunity to get into mutual funds that target a range of American stocks, not individual gambles on individual companies.

The result is likely to be depressing. In 2005, unable to access better-quality foreign assets, Israel's institutional investors will continue to buy low-yield negotiable and non-negotiable bonds issued by Israelis.

Unless somebody demonstrates leadership over there at the Finance Ministry and demands that the tax officials cobble together simple rules lowering tax on all kind of foreign securities to 15 percent, in 2005 the institutionals managing our money will continue to load our portfolios with local stuff issued by their friends and cronies. The banks will push the bonds of their biggest borrowers, and we will all continue to wallow in our little local swamp, safe and secure from the plethora of goods outside the country.

And Bibi? If he wants to continue pitching "open", "cruel" markets and the shift of billions of dollars at the touch of a button, or the need for the Israeli marketplace to obey international rules, then tax parity is the first step.