Eitan Sheshinski: Tear Down the Pyramids

Haredim and Arabs should get to work, Ran Belinkov tells TheMarker TV.

The committee on concentration and competitiveness may be leaning against taking firm action to dismantle Israel's business pyramids, but Eitan Sheshinski has no such qualms. They should be dissolved, he told TheMarker Television in an impromptu interview on Rothschild Boulevard, in the middle of the tent protest.

Sheshinski, an economics professor, headed the committee that ruled that the state deserved a bigger chunk of income from the exploitation of Israel's natural resources, specifically the giant gas reserves found in the Mediterranean seabed. Now he turns his attention to economic concentration, one of the Israeli economy's key problems.

Eitan Sheshinski - Daniel Bar-On - August 2011
Daniel Bar-On

In pyramids, the owner at the top has big holdings in the companies upstream, but small holdings in the companies downstream. Profits in the group flow to the upstream companies. Also, the owner would not cavil at entering into risky ventures with downstream companies, Sheshinski explains.

Moreover, while a transfer of profits is a tax event in the United States, it isn't in Israel. One way to deal with Israel's pyramids is through tax reform, he suggests.

Based on your experience at the Sheshinski Committee, how appropriate would it be to constrain the business barons?

"Caution is due when dealing with the tycoons," Sheshinski says. "Remember they are at the head of much of the business sector. I'll give an example. Dudi Wiessman, who owns the fuel company Dor Alon, said at the President's Conference that he can't get credit from the First International Bank of Israel [Beinleumi] because its controlling shareholder, Zadik Bino, also owns Paz Oil, which competes with Dor Alon. He tried to get credit from Bank Leumi, but it owns 20% of Paz. So the issue of cross-ownership of both finance and nonfinance companies needs handling."

There had been a suggestion that Sheshinski head the team talking with the protesters. But, he says, while he might engage in any of the aspects under discussion, he doesn't want to take on the whole package "and fire in all directions." It's for the prime minister to handle the matter comprehensively: "I as an economist have to focus on one thing."

Where should the government cut the budget to meet the protesters' demands?

"At the moment I don't believe the defense budget is on the table," he says, adding that some voices at the Defense Ministry have been, if anything, calling for more money. "But that may just be their opening position. There's also the question of budgets for the settlements in the territories. I don't think that with this coalition structure, the prime minister will address that."

What can be done?

"First of all, capital gains tax can be increased," Sheshinski says. "In Scandinavia capital gains tax is 28% and here it's 20%. Second, we're among the only countries in the world that have no estate tax [on inheritances]. The U.S. has the most progressive estate tax system." It's also true that if Israel enacts an estate tax law, some capital will move overseas, he qualifies. There is also the question of from what level to impose estate tax; he feels it should apply only to large inheritances.

What about privatization?

"Most of Israel's infrastructure has already been privatized," Sheshinski says. "They're still thinking about privatizing some services such as the Well Baby [Tipat Halav] clinics or preschools. The committee being formed now by the Finance Ministry [to deal with the protest] needs to look at where the government should retain responsibility and what areas should be outsourced. In my opinion, all markets that are competitive should be privatized."

Two areas difficult to privatize are national infrastructure and public services, Sheshinski says: One can replace government control of a monopoly with a supervised private monopoly, but supervision can get twisted. Before any such thing is done, the way must be investigated.

Go to work, stop encouraging big families

Ran Belinkov, former director-general at the Finance Ministry among many other things, addresses the problems raised by the protesters from another angle entirely.

"The Israeli governments haven't cared about the periphery. The [parties] write in their charters in favor of the Galilee and Negev but after they get elected, they make the center a higher priority," Belinkov told TheMarker Television, broadcast online via TheMarker Hebrew-language website. To build a train system in Tel Aviv at a cost equivalent to all the budgets of the peripheral towns is to prioritize the center, he says.

"Housing prices in the center would be higher than elsewhere even if there were more land to develop," Belinkov says. In the long run, the state will have to spread out far from Tel Aviv, to the Galilee and Negev - otherwise Israel will wind up with two societies, rich in the center and poor everywhere else.

"The protests today will look like child's play compared with what will happen here," Belinkov predicts.

What does the protesters' call for social justice actually mean?

"The intent seems to be that the government provide more money for welfare, education, housing and health care. The question is how to finance it."

So how should it be financed?

"The budget must not be breached," Belinkov urges. "Priorities have to change. The question is why they aren't being changed. One possibility is that there may be governments that don't want to change the priorities because they have a certain view of things.

"For instance, [Prime Minister Benjamin] Netanyahu began this government with increasing child allowances. Increasing child allowances means to encourage the Haredim and Arabs to work less. I don't know to what degree that decision was political and to what degree it was a worldview. But regarding parties like Shas, it's a question of worldview. I don't know to what degree they really want to vanquish poverty rather than perpetuate it. They should go to work and stop encouraging them to have more children."