Analysis

Israel's Labor Party Takes the Socioeconomic Agenda Off the Table

Its plan to tax the upper middle class to pay for a giant social-welfare plan discredits the idea of helping the needy

Amir Peretz and Orli Levi-Abekasis at a campaign rally, Ofakim, August 13, 2019.
\ Eliyahu Hershkovitz

Give Amir Peretz and Orli Levi-Abekasis, leaders of the Labor-Gesher alliance, this much credit: After they unveiled their socioeconomic platform early last week, they elicited a response from the other parties and put the issue on agenda.

For instance, Naftali Bennett, of the new Yamina union, took time off from his skirmishes with Prime Minister Benjamin Netanyahu to warn against the risk of “turning Israel into Venezuela.”

The attack on Peretz and Levi-Abekasis weren’t just personal but about substance as well. Bennett, for example, said the Labor-Gesher program would double the taxes imposed on the stock options high-tech workers often are awarded. “Within a year there won’t be any startup companies here,” said Bennett, who reminded voters that he himself was behind two startups in the past.

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That said, Bennett admitted, “Amir Peretz’s intentions are good, but good intentions can lead to disaster.” What could be so good in the plan from the viewpoint of a right-winger like Bennett?

The truth is there’s no politician in Israel who would ever criticize the first half of the Labor-Gesher scheme. That’s the part where the government spends 30 billion shekels ($8.5 billion) a year supporting the weakest segments of the population.

Labor-Gesher is calling for an increase in the minimum wage to 40 shekels an hour, versus 29 today; a ban on the phenomenon of outsourcing labor; construction of 200,000 units of public-sector housing available to those without money to buy a home; provision of free education from birth; the doubling of old-age allowances; the addition of hundreds of hospital beds; and exemption of 100 basic consumer products from the value-added tax. And that’s not the entire list.

In the United States, politicians from the hard right say that any kind of government assistance constitutes a disincentive to work, but here in Israel, fortunately, that narrative has never taken hold, even on the right.

Still, the Labor-Gesher program is facile: It deals only with redistributing the government budget in favor of the less well-off, without addressing the fundamental problems of the Israeli economy: for instance, in the realms of labor, the low level of productivity and the lack of competition.

What can be said in its favor is that each component of the proposal deserves to be part of the public discussion – especially on the eve of the Knesset election.

The big problem with the plan, of course, is the other side of the ledger: namely, the budget to pay for it. Peretz, Levi-Abekasis and their advisers who devised it don’t ignore this and suggest various ideas. The only problem is their solutions would undermine the goals they have set for themselves, possibly even irreversible damage.

The irreversible damage isn’t just to the Labor Party itself but to the hope that one day Israel will evolve into a progressive social democratic society from the oligarchy it is today – an oligarchy in which a small stratum of billionaires and the politicians in their pockets capture most of the added value generated by the economy.

Here’s why. The Labor-Gesher plan calls for raising the 30 billion shekels of revenues needed annually to cover its costs from what its initiators call a “wealth tax,” by way of a marginal income tax rate of 57% on incomes of over 44,000 shekels a month and 65% on incomes of over 54,000. That’s the main revenue source for the proposal.

In addition, they call for measures that have been raised in years past, such as raising the capital gains to 30% from 25%, generating another 6 billion annually by cracking down on the black market; taking money allocated in coalition agreements and for the settlements; and finally, by increasing the level of national debt to gross domestic product.

Higher taxes on the wealthy are the hallmark of a progressive tax regime; the wealthy are not only subject to higher rates and typically contribute more to the total tax take in absolute money terms. That’s not the issue. The devil is in the details: that is, who will pay exactly how much.

In the United States, a wealth tax has been on the agenda since the start of the year. Senator Elizabeth Warren, who has a realistic shot at becoming the Democratic presidential nominee, has spoken about a real wealth tax based on the value of a taxpayer’s asset. Her plan is to tax wealth in excess of $10 million at 2% annually, and wealth over $50 million and more at 3%,

For her part, congresswoman Alexandria Ocasio-Cortez has proposed a 73% marginal rate on annual incomes of $10 million or more. Academic research has found that the optimal marginal tax rate on very high incomes is 73% or even 80%. The economic logic is that at a certain level the income the wealthy are making has no real meaning. But it is critical for low-income people.

Taxes at these levels existed, even in the U.S., in the 1960s and ‘70s.

But the Labor-Gesher plan doesn’t talk about taxing millionaires and billionaires, or even about the 1% who earn on average 140,000 shekels a month. The Labor-Gesher tax would apply to the top 10% of Israel, or about 420,000 taxpayers who, according to Israel Tax Authority figures, earned in 2017 an average of 44,082 shekels a month.

That isn’t a wealth tax so much as it is a success tax – a tax on people who have been successes but not phenomenal successes. It will fall on tens of thousands of executives, self-employed and high-tech workers. It would lift Israel into first place for marginal tax rates, way above the No. 2 economy.

In contrast to what Bennett claimed, it won’t turn Israel into the next Venezuela. Venezuela’s top marginal tax rate is 34%, less than Israel’s. Venezeula’s economy didn’t collapse because of high taxes but because of corruption and mismanagement.

But a tax on the top 10% is destined to do the Israeli economy damage, for a variety of reasons. Among them is an exodus of people and companies overseas where they can enjoy a higher standard of living.

The Labor-Gesher plan will never see the light of day. This political alliance is struggling to keep above the cut-off line for entering the Knesset and even if it does and it joins a coalition – there is no government in Israel that will ever approve a 65% marginal tax rate.

The damage they have done with their proposal isn’t due to the risk that it will ever be implemented, but because such a delusional plan has cut short the possibility of any serious discussion of a more progressive, social-democratic program. Israel needs such a plan, including a wealth tax on millionaires and billionaires, but Peretz and Levi-Abekasis have taken it off the table for now.