Why Should Wealthy Israelis Get Tax Breaks?

Years ago Israel's High Court asked the state to revise its arbitrary,skewed policy of granting tax breaks to outlying locales, but maybe it's better to do away with these benefits altogether?

Kfar Vradim is one of the 10 wealthiest communities in Israel. It is ranked nine out 10 on the Central Bureau of Statistics socioeconomic scale. However, what distinguishes Kfar Vradim from other affluent communities in the country is that it is located deep in the Galilee region, in the so-called social and economic periphery.

As a result, despite its affluence, Kfar Vradim is one of 180 peripheral communities where the state grants residents a big financial break: a reduction of between 13% and 25% in the income tax bill. However, most of the communities in question are relatively poor and do not pay income tax at all. In fact, out of the 440,000 residents living in these 180 locales, only 60,000 people – 14% of the area's population – benefit from the tax break. And about 5% of those 60,000 live in Kfar Vradim.

This counter-intuitive outcome – whereby only a tiny and well-off minority actually benefit from the gift the state gives to residents of the periphery – is one of the reasons why the state must rethink this whole scheme. Another reason is the inflated dimensions to which this benefit has grown.

For example, anyone living in Mitzpeh Ramon in the south pays no income tax on income below 20,000 shekels ($5,700) per month. In Nahariya, residents pay no income tax on the first 15,000 shekels they earn per month. Up north in Kiryat Shmona, even those who earn between 25,000 and 28,000 shekels per month are exempt from income tax.

The third and decisive reason the government must reconsider this situation is the great ethnic inequality of the policy used for determining which communities qualify for the tax benefit. Among the 180 locales that have enjoyed this break, 167 were Jewish, whereas only 11 Arab communities benefited from it (in addition to two mixed Jewish-Arab cities) – despite the fact that Arab towns and cities constitute a significant proportion of the total number of communities in Israel’s periphery.

Why are residents of Beit Jann and Kisra-Sumei, two Druze communities located deep in the Upper Galilee, not entitled to a tax break, whereas people living in nearby Meron and Yehiam enjoy this benefit? Why does Arad receive a tax break while the Bedouin village of Kseifa next door does not?

These questions were raised in a petition to the High Court of Justice filed in 2006 against the discriminatory application of tax benefits in peripheral areas. The state could not answer these questions adequately, and was forced to admit that the communities receiving tax benefits were selected in an arbitrary fashion without any clear criteria.

In fact, it turns out that locales with ties to the political establishment – primarily Jewish communities with a connection to the Likud party central committee – receive the tax breaks. But communities without any "political capital" or association with important figures in the Knesset, including almost all the Arab locales, have been left out in the cold.

The situation is all so clear and simple.

Yaron Kaminsky