Lapid's Budget Hits Israel's Rich, but Not Hard Enough

Israel's rich aren't getting as easy a ride as most people think. The main flaw with the impending budget cuts is that they spare powerful interests like the defense establishment and the labor unions, but these groups may yet be made to pay.

The rallying cry of the renewed protest against the economic program for 2013-2014 is that the entire burden is being shouldered by the middle class: The rich are paying little, the middle class is paying more and the poor are paying the most.

The last clause is entirely accurate. The proposed Economic Arrangements Law lands one of the biggest blows ever against Israel's poor. Without a doubt, it is the biggest blow since the ruthless decrees of the 2003 budget, which incidentally ended up saving Israel from the clutches of the economic crisis.

Today the poor are being hit hard for a lack of choices – there is no alternative but to cut – but also for ideological reasons.

In 2003, the ideological goal was to pressure the non-working poor, particularly Haredi men and Arab women, to go out and work. In 2013 the ideology remains more or less the same, but this time the goal is more ambitious: to force the Haredim – and to a lesser extent, Arab women – to study, serve in the army and work.

To the 2013-2014 budget's credit, it is very straightforward about its ideology. Perhaps this is because it is the same as the campaign slogan of Finance Minister Yair Lapid and his Yesh Atid party in the latest election. Lapid promised to target the Haredim and is following through.

But when it comes to the middle class and the rich, he seems to be reneging. Lapid promised to help the middle class, and the impression is that the budget does the opposite, taking much more from the middle class than from the rich.

This is a misconception that needs to be partly dispelled. The rich are also paying dearly in the budget. Boosting income tax rates by 1.5% raised Israel highest tax bracket to 51.5%, violating the norm established in the late 1980s of allowing everyone to keep at least half their earnings. It also puts Israel among the countries with the highest income tax. France recently imposed a 70% wealth tax, which may not stand the test of time, and Scandinavia's 56% income tax rate – the highest in the world – is not far from Israel's.

Another wealth tax imposed by the budget is betterment tax on property investors – anyone owning more than one home. From now on these people will have to pay full tax – 25% - on profits from property sales, while single-home owners will continue to be exempt from this kind of taxation.

The corporate tax also went up 1%, and benefits under the Capital Investment Encouragement Law were pared back slightly. The capital gains tax stayed the same, but it was raised 5% just a year ago. And provisions were added to the budget to intensify the war against the black market and tax sheltering, which could hurt the economic elite.

But all these changes are dwarfed by the truly shocking feature of the budget: its reduction of tax exemptions on pension savings. With everyone focused on the battle surrounding cancelling the tax exemption on advanced training funds, the Finance Ministry pulled out a far-reaching proposal to lower the salary level beneath which pensions are entitled to tax benefits, from NIS 35,000 to NIS 15,000.This means the richest 10% of the population lost most of its pension savings benefit, in effect, hitting it with a significant income tax hike.

The middle class has nothing to complain about, at least as far as being able watch the rich suffer. The top decile took a fair blow. So what is feeding the middle class' deep disappointment? It is partly the heavy burden it is bearing, because the rich, while paying dearly, aren’t paying dearly enough. But mainly, it is that too many powerful interests in Israeli society hardly paid at all, leaving a heavy burden on the middle class' narrow shoulders.

Meanwhile, what the rich should be talking about is the inheritance tax, an important and just toll but also a very dangerous one. It needs to be seriously and carefully considered before being imposed – there must be a debate.

Another issue that deserves attention is the push to revoke the Capital Investment Law. The law is very expensive, but its significance for employment in Israel is huge. The law was changed just two years ago on the recommendation of a committee headed by Finance Ministry director general Haim Shani and should not be changed again without a thorough examination. In short, the treasury cannot avoid setting up a new committee to reexamine how necessary the law is and what price should be paid for it.

The budget's main failing in equally distributing the burden is that it fails to confront the major loci of power that are siphoning off billions of shekels in benefits and impairing economic efficiency.

The defense budget is one such locus.

The Histadrut labor federation and the public sector are another source of power. Their strength was enough to ensure that the tax benefits on advanced-training funds were left untouched, while tax benefits on pension savings were cut drastically. Even worse, not even a cursory effort was made to align contributions to unfunded pensions with contributions by workers saving through regular accrued pensions.

And worst of all, the economic program does not even mention public sector reform – nothing on electricity, nothing on the ports. There are no changes to the collective labor agreements or the management culture in the public sector. In its defense, the treasury claims the Economic Arrangements Law is not the appropriate framework for such measures and that democratic debate and the short timeframe in which the budget is passed require the reforms to be brought up for Knesset approval separately. If that is the case, the middle class need not worry.

On the other hand, it is possible that the absence of structural reform to the public sector in the law reflects Lapid's unwillingness to confront Prime Minister Benjamin Netanyahu, representing the defense establishment, and the Histadrut. If that is the case, worry away.

Rami Shlush