Correct use of fruits of growth

Over the past four years, unemployment in Israel has dropped consistently. It stood at 11 percent in January 2004, and it is now only 6.9 percent. This means that about 400,000 people have joined the labor force and are no longer dependent on state handouts, having moved off unemployment payments and into paid work. This constitutes an important social change, restoring dignity to those who earn the fruits of their labors.

The drop in unemployment is the result of rapid economic growth that affected both the traditional areas of production as well as high tech. Growth stems from a responsible budgetary policy and structural reforms. To ensure continued growth there is a need, also in 2008, to preserve the limits on budgetary spending. In other words, not to give in to excessive demands by MKs and political parties.

Rapid growth resulted in significant increases in tax revenues, and therefore it is possible and necessary to take action to narrow the levels of income inequality. These have widened a great deal during the past 20 years and threaten social stability. With this in mind, the Knesset approved a series of changes this week to improve the condition of the middle and lower classes. It is worthwhile to examine each change on its own merit.

Raising the taxation on the monetary value of having a company car is a correct decision. It turns out that those who have received a company car have enjoyed too low a tax for the benefit. Lowering corporate tax and the tax grades for the middle and upper classes is another right step. These are measures that encourage work and investment. Whoever wants to attract investments to Israel must join the international trend toward lower taxes.

Another step is applying a negative tax regime. The idea is that those earning little will receive from the state an additional NIS 100 to NIS 400 per month. On the face of it, this means an improvement for poorer workers, but the proposed plan is complicated and its usefulness questionable. The money is not provided in a routine operation through a monthly payslip, but a year later, after the employer completes many forms - which not everyone will want to do, especially in small business and in the periphery.

The method encourages cheating and creates a stigma as the beneficiary becomes dependent on the state. The method also does not encourage advancement at work because as wages increase, the stipend ceases. As such, it is not worthwhile to work overtime or be promoted. Research shows that the cost of such a program is high, requires a great deal of bureaucratic paperwork, and has limited value.

Instead of a negative income tax another step should have been taken: raising the minimum wage. Two weeks ago the Knesset approved the decision to delay adjusting the minimum wage. This is a serious mistake that will leave the lower classes earning monthly salaries of NIS 3,710 instead of NIS 3,850 - which is also too low.

Something that has been promised but has not yet been carried out is the introduction of mandatory pension plans for all workers - an important step to ensure the futures of a million workers whose employers do not contribute to their pensions. Hopefully the mandatory pension legislation will pass soon, with active support by the employers and the Histadrut labor federation.