A young Israeli high-tech entrepreneur poured out his heart to TheMarker this week: “Why does Israel fight so hard to keep Intel here, giving it billions in grants, while at the same time giving up on the human capital of Israeli high-tech, which could also so easily carry out a “brain drain”?
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He was referring to the Knesset Finance Committee’s decision this week to reduce tax breaks on retirement savings. The committee voted to reduce the ceiling on wages eligible for the tax benefits from about 39,000 shekels ($9,970) a month to only about 24,000 shekels. The main group that will be harmed by this change in the rules, in other words the group whose salaries range from 25,000 to 40,000 shekels a month and who will suffer most of the cost of this worsening of conditions for their retirement savings, are the brilliant, young engineers in Israeli high-tech.
So does the government genuinely surrender to Intel’s threats while ignoring its most successful human capital, allowing it to leave the country so easily? In fact, yes and yes.
There is no doubt the state doesn’t woo its human capital as enthusiastically as it does multinationals such as Intel, Teva Pharmaceuticals, Check Point Software and other big exporters and employers. The decision to cut tax benefits on retirement savings for high earners is just another example of this.
A data analysis conducted by the National Insurance Institute for TheMarker shows how few years those who earn more than 24,000 shekels a month continue pulling down such salaries. In 2013, some 258,000 salaried Israelis earned over 24,000 shekels a month for at least one month. When the NII looked at the changes in wages for these people over the preceding decade, from 2004 to 2013, it found that about 25% had high incomes for most of the period. But 53% had high salaries for five years or less of the decade.
The figures were even clearer once the NII analyzed the data of those over 50 and those from 35 to 49. Of the older group of high earners, which is presumably made up mostly of senior executives, 36% earned high salaries for most of the decade and 36% earned high salaries for fewer than five years.
The 35 to 49 group fared much worse. Only 17% had high salaries for most of the 10 years, while 58% had them for fewer than five years. Nearly 40% earned over 24,000 shekels a month for only one to three years between 2004 and 2013.
Grabbing the brass ring
Most of these high-earning, relatively young Israelis are computer engineers. They grab the brass ring of a prestigious, well-paying job, but their luck does not last for long in a field that puts a premium on youth. By the age of 45, most of them find themselves outside of high-tech. That means they don’t have very much time to earn the big bucks. Naturally they want to use that window to save for retirement and to make up for all the low-money years before and after. Young tech engineers want the government to let spread their retirement savings over many years and to take advantage of the “fat” years to save as much as possible. But the government doesn’t let them. The government calculates retirement savings tax benefits on an annual basis. Together with this week’s decision to dramatically reduce the benefit ceiling on higher incomes, that means these young high engineers can’t accumulate enough retirement savings in their few good years. They will reach retirement with a much lower salary than at their peak, a regrettable fact that at least has one positive side.
The transition from a working life to retirement will be less traumatic, but it will also come with a monthly pension check much lower than what they could have earned if only the government allowed them to allocate their retirement savings benefits over their entire working career. This is how the government has turned its back on its high-tech engineers, because it is now keeping from them one of the few tax breaks they have, in the form of the new, low and arbitrary ceiling that is calculated on a year-to-year basis.
The basis of calculating these tax benefits for retirement savings is different than the accepted practice in many other countries, which allow salary earner to distribute their tax breaks over their entire working lifetime. In Britain, for example, the government sets the savings ceiling over a lifetime, as a well as a limit over a five-year period. The rate at which the savings are accumulated over both these periods is none of its business. One can save more for part of the period, and in doing so compensate for lower savings during other periods.
Instituting a similar mechanism based on lifetime savings for retirement, or at least over some specified number of years, is the obvious change required. Such a mechanism would correct most of the injustice caused to Israel’s young tech engineers.
But the expectation that the government will placate its most valuable and productive workers by giving them tax breaks is a foolish expectation. The tax system is intended to be progressive, one that transfers money from the richer workers to the poorer ones. It is unimaginable that the government could levy a progressive income tax, while at the same time rendering it fruitless by providing the best off with larger tax breaks. This is a move with an internal contradiction, and one that is not transparent and also inefficient economically. The better-off are supposed to pay higher taxes, and this must include their receiving fewer tax breaks.
True, the government has deviated from this principle in every way concerning the Law for Encouraging Capital Investment, where the richest and most powerful companies get the biggest tax breaks. Many have noted and fought this illogical injustice. The law has not increased employment or exports, and exports by themselves are not an important economic goal. Rescinding the law would enable corporate tax rates to be lowered and would encourage employment and economic growth, too.
Even though economists have pointed out the flaws in the capital investments law, government officials fear that exporters will abandon Israel. The ability of powerful industrialists to extort the government is what has caused it to give in. It is doubtful whether this an optimal policy, but there is certainly no room to exacerbate the damage caused by handouts to large and powerful corporations by hurting the interest of the country’s most valuable and productive workers.
Extending the period for calculating the tax breaks for retirement savings will help keep this valuable human capital in Israel and in high-tech, but it’s not enough. More must be done to make Israel fairer and more efficient, a country whose best and brightest choose to remain because it is a good place to live, not because it hands out tax breaks in surrender to powerful interest groups.
This is a marathon, not a sprint, and its goals must include raising productivity, improving public services, upgrading Israel’s archaic labor relations system, bringing more Israeli Arabs and ultra-Orthodox Jews into the workforce, improving the Knesset’s government-oversight performance and reducing inequality. Handing out tax breaks is just one small item on the agenda.