Analysis

A Guide to Becoming a Billionaire in Israel Without Doing a Stroke of Work

In 2007, there were 173 millionaires on the list of Israel's 500 richest - today only 17, simply because the others have almost all become billionaires

French economist and academic Thomas Piketty attends a news conference by French Socialist party 2017 presidential candidate Benoit Hamon in Paris, France, March 10, 2017.
CHRISTIAN HARTMANN/REUTERS

The rich in the State of Israel are getting richer every day, and the pace at which they’re getting rich is increasing.

Ten years ago, TheMarker’s list of the 500 richest people in Israel had 173 millionaires on it – that is, millionaires constituted 35% of the list. Today, only 17 of Israel’s wealthiest people can be called millionaires, simply because the others have become almost billionaires and billionaires.

The 500 richest people in Israel together are worth $168 billion – more than double their combined worth in 2007 ($81 billion).

Why do the rich continue to get rich, while the rest stand still?

There are several answers, some of which have less to do with the deeds of the rich themselves and more with the laws of mathematics.

The first rule in every class on finance and financing is the formula of compound interest, or what happens to savings that accumulate only a few percent each year but over a relatively long period of time.

This is a formula that causes the savings to rise not in a straight line but exponentially, and after a few years, it begins to climb very quickly.

Here’s an example: Suppose an entrepreneur made an exit in 2007, took home $100 million and gave the money to a conservative investment manager. He did not invest in real estate or startups. Assuming that his money earned an average of 5% every year, today he’s worth no less than $163 million.

Of course, for many wealthy people, returns of 5% a year sound positively paltry. People who invested in Israeli real estate over the past decade – and the rich love to spread their wealth in real estate – have doubled their money or more. (Note that such transactions are based on borrowed money, meaning they’re usually leveraged.) And those who did invest in a portfolio of technology companies and startups, with a little luck, have also made a killing: The Nasdaq technology index rose threefold in the last decade.

At levels like that, the formula of compound interest goes nuts. An initial asset portfolio of $100 million, rising 10% annually, will yield $260 million after 10 years. If our millionaire entrepreneur was lucky or perhaps smarter than others and managed to achieve a return of 15%, the amount would climb to over $400 million.

If the millionaire deposited the money 15 years ago and enjoyed an annual real yield of 15%, today he has $800 million in the bank, eight times the original exit amount.

International comparison shows that the returns achieved by Israel’s wealthy are no exception. The French economist Thomas Piketty, in his book “Capital in the Twenty-First Century,” published three years ago, calculated that billionaires’ wealth grew by 6.4% to 6.8% a year between 1987 and 2013. This is an average range and the actual range between the actual rich is vast, as are the figures for different periods.

Piketty writes that Forbes’ list of rich people over the years also shows the power of compound interest: The wealth of the rich rose from $400 billion to $5.4 trillion between 1987 and 2013, almost 14-fold.

There is another way to calculate the yields that the rich get on capital: the investment data of American universities. Between 1980 and 2010, these universities achieved average returns of 8.2% per annum (in real terms, less management fees and the effect of inflation on the value of the dollar).

The top three – Harvard, Yale and Princeton – achieved average yields of 10.2%. These are high yields over long periods, despite some midway market crashes (including 1987 and 2008). They prove that the rich have the ability to purchase better investment services than the regular public.

The rich, of course, also benefit from economic growth, and the Israeli economy has grown briskly in the last decade. Last year it was 4%, and business sector growth, where most of the millionaires’ money is invested, did much better.

But the whole picture shows that rich people’s share in the growth of most economies has steadily increased. Why? Because of the capital they have already accumulated, and the compound interest; because they manage to make high returns on investment assets; and because they can afford clever accountants and lawyers who can slash their tax bills, sometimes to zero.

The ability to pay low taxes has increased in the past year. The Israel Tax Authority says that amnesty allowed thousands of Israelis to bring home billions of shekels that had been squirreled away in tax shelters overseas.

Exempt immigrants

The police investigation into the gifts that Prime Minister Benjamin Netanyahu received from businessman Arnon Milchan reminded us of the thousands of new immigrants and returning residents who get 100% exemptions on tax. Under the so-called “Milchan Law,” they don’t even have to file returns.

Half of Israelis don’t have any assets and everyone else pays tax through the nose, both on income and on capital gains. Meanwhile, the upper 0.1% gets high yields on savings and may well not pay capital gains tax.

This also applies to passive investment. Many of the rich can exploit active investments. In some business sectors, turnovers shot up in the last year. For instance, the number of imported car deliveries jumped and the families that own the car importers made money hand over fist.

Some say counting the pennies of the rich is pointless because it’s all on paper anyway. Assets can rise and fall in value and if they aren’t liquid, come the market crash – and market crashes do come – the value of these millionaires and billionaires will shrink. Skeptics are certain that they’re all going to start sobbing when the central banks rein in their accommodative economic policies. Optimists think we’re in for a global boom and note that the rich in America are about to pay less tax.

We can’t predict which of the two scenarios will materialize.

What do the rich think about all this? It turns out they’re pretty upset. A recent survey by the Swiss bank UBS of over 2,000 rich people showed that 82% of the world’s wealthiest people these are the worst of times: days characterized by the greatest political and economic uncertainty in all of human history, no less.

Some 71% of the respondents blame politicians for being too spineless to handle the pressure put on them. Many of them fear for the stability of the entire financial system, and most see volatility and uncertainty as a threat rather than an opportunity.

Nu, if you are very rich, obviously you hate uncertainty; you fear scenarios that could diminish your capital. But the survey also shows that 77% of the millionaires think they know how to navigate their money and are optimistic about their financial situation; 51% think their economic situation will improve (only 13% think it will worsen), and 57% think they will meet their financial targets in the long term. In other words, there is anxiety, but it isn’t so terrible.

In 2013, Piketty wrote that barring bold steps to constrain inequality and the wealth of the rich (he proposed direct taxes on capital), these growing gaps will cause social unrest, hurt democracy and trigger political upheavals – not necessarily in good ways. Looking at events around the world from Turkey to the United States to Brazil, it seems that he was right.