On Teva, Tax and Pragmatic Populism

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People complain about the decline of the social-justice protest, but what they’re suffering from is mainly short memory. They forget that just five years ago there was practically no economic debate in Israel, and politicians routinely managed to fool the people with prating about security needs and suchlike sound-bites that the press loves but that mean little in the long run.

People also have trouble grasping that true economic reforms take a long time.

Another group of protest malcontents complain that populist politicians riding on sour public sentiment suggest reforms that sound good but are shallow as puddles and profoundly miss the point.

Populism in and of itself isn’t a bad thing. In democratic societies, at normal times, the public couldn’t care less about complex economic issues, and those influencing regulation and legislation are the powerful interest groups. Yet after a crisis, when public interest suddenly awakens, populism can bring balance to legislative processes; it can push politicians to act for the greater good, rather than the good of some narrow interest group.

Thus the Israeli social-justice protests in the summer of 2011 played a major role in accelerating reform of the mobile-communications market. Without the protest, the cellular tycoons might well have neutered the reform, or slowed it.

The same applies to the economic concentration committee, which orchestrated the most important reform in a decade.

The tycoons, bankers and ignorant (or tame) regulators and journalists all but destroyed the economic concentration committee in 2011. But the protests, which had hundreds of thousands of Israelis hitting the streets, forced a mindset change, and the politicians had to adopt the populist concepts − which were, in practice, professional, balanced and courageous.

Candy time

Now Teva Pharmaceutical Industries and the issue of taxing multinationals are in the dock. Here too, the social protest and mindset change shoe-horned “populism” into the cabinet debate, meaning, politicians took very different positions from the ones dictated by the interest groups over the years.

Indeed, the claims by politicians and the press regarding Teva are shallow as puddles. They shriek that the state “gave” billions of shekels to the pharma giant, billions that could have gone to welfare or small businesses.

Reality is more complex: The state didn’t budget billions for Teva. If Teva closes down some of its plants in Israel because other countries offer the drug company sweeter tax rates, or some other candy, the cabinet won’t be able to “transfer” any billions it “gave” Teva to some cause.

Israel, like any other country, has to compete for the favor of multinationals. It can’t be the one that changes the rules of the game. The question, therefore, is otherwise: Is the bottom-crawling tax rate that the state did give Teva indeed the best it could get from the company, while still making it pay for the firm to keep its operations in Israel? I’d wager that’s a No.

It did and will pay for Teva to stay in Israel even at a much higher rate of tax. The regulator failed the people at best, or sold the people at worst.

My assessment that Teva could have been charged higher tax, and it would have stayed, is based on the fact that Teva (unlike other companies) maintained broad operations in Israel up to 10 years ago, when tax rates were much higher. It may well have built its plant in the south before applicable tax sky-dived from 16% to nearly 0%.

Teva’s case is extreme, but the wave of populist anger should be exploited to investigate the circumstances under which Teva got its enviable tax cuts. The populism and superficiality (and failure to understand) among politicians and reporters alike isn’t as scary as it’s painted. At first they lead to intense public debate. In this case it will force Teva and the state to show the people more figures and explain themselves. They will have to find a new balance point for the perks Teva and other big businesses get.

The chance that populism will push the politicians to eliminate perks for Teva entirely, and that Teva will pull out of Israel, is small. The public wants Teva to stay. But the people also want the negotiation with it and other big companies to generate the maximum for the taxpayer.

We do need to watch out for populism and the tendency among certain politicians − and reporters − to adopt a superficial, showy line in order to look “belligerent” or “caring.” But we also need to remember that only populism can bring balance back into politics and regulation, which in normal times are controlled by interest groups.

The Israelis who marched during the social protest of summer 2011 represented the beseiged middle class. Credit: Tal Cohen

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