The Bottom Line / No lobby left for capital gains tax
The top rank of the treasury preempted the committee on tax reform (Rabinowitz Committee II) by rushing to publish its recommendation to tax stock exchange profits and interest on savings plans.
A. The top rank of the treasury preempted the committee on tax reform (Rabinowitz Committee II) by rushing to publish its recommendation to tax stock exchange profits and interest on savings plans. This early publication leaves open a lot of questions, mostly technical questions concerning the rate of the tax and the way it will be levied.
As far as is known, the tax rate on profits is expected to be under 25 percent, and is also likely to be gradual (at first, the rate will be low, and will rise over the coming years).
As far as is known, the tax will entail a compulsory income tax declaration, although not a complete one. It is possible that the tax will only be imposed on those who have a large equities investment portfolio, or that a tax at source will be imposed which can be transformed into capital tax payment thorough a voluntary declaration to the tax authorities.
In any case, the early publication of this planned step only increased the uncertainty in the capital and financial markets, rather than reducing it. It also left the Rabinowitz Committee high and dry: If the main conclusion of the committee's report has already been widely publicized, there is no reason to wait for the report itself.
B. The lobby which so strenuously opposed a proposed tax on stock exchange profits, proposed by the government of Yitzhak Rabin, in 1994, no longer exists. The specter of the economic elite whispering dire warnings to the prime minister during glittering gala evenings of the consequences of imposing a capital gains tax has not been seen for quite some time. Sharon is no Rabin, and the atmosphere does not allow for glittering evenings, but the disappearance of the sort of obstreperous lobby against such a tax must be attributed also to lessons learned at the time.
The economic elite and the rich prefer these days to maintain a "low profile" and press the issues most important to them quietly in the corridors of power. And it appears that a tax on stock exchange profits is not the most burning issue bothering them right now.
It is estimated that the impact of this kind of a tax on the upper echelons will be minor. In any case, we're not going to be seeing all that much profit from the stock exchange in the next two or three years, and no one is expected to make a killing on the stock exchange in the foreseeable future.
Moreover, there are some who even argue that if the rich are going to be offered as a sacrifice to the public, it is preferable that the blow come via a capital gains tax. This way, they will win points for helping the national austerity effort, without actually having to dig deep into their pockets to pay a lot in taxes.
C. Nonetheless, there are still some voices objecting to a capital gains tax. In addition to the technical arguments - a capital gains tax requires the establishment of an expensive collection mechanism that will not justify its cost in terms of revenue - there are also some economic arguments. Among this is the expected harm the change could bring to the Israeli Stock Exchange, which is hardly enjoying a surfeit of popularity among the public these days.
The positive discrimination which the stock exchange has enjoyed until down, by virtue of tax benefits, will be canceled, so that the Israeli Stock Exchange will lose one of its main drawing cards for the greater public.
The criticism against taxing savings plans is much easier to justify. Essentially, it raises fears that the motivation for saving will be sorely reduced, and will plunge the Israeli market into a financial torrent. Against the background of the prevailing financial instability that already exists, this is not an inconsequential concern. The possibilities of a rush on foreign currency or on transfers of funds abroad are indeed likely.
D. In order to prevent funds from fleeing abroad, the tax system can be transformed into an international one, rather than a personal one, based on a taxpayer's assets around the world. It is almost certain that the Rabinowitz Committee, when it presents its report in the coming month, will recommend such a transition. In order to prevent a rush on foreign currency, one can put profits and investments in foreign currency on the same footing as other investments: Differences in real exchange rates can be calculated as capital gains and taxed like any other capital gains.
But this possibility is not being considered. The formal explanation for this is that the tax authorities view differences in rates as a form of linkage [to the consumer price index], which is not considered to be profits. In view of the fact that Israel is a shekel-based country, the economic rationale behind this stance still requires an adequate explanation.