If you’ve never heard of Manikay Partners, it’s time you did: You’re about to give a big favor to the Australian-owned, New York-based fund that bought 20% of the Tel Aviv Stock Exchange this year. Together with four other foreign investors, Manikay holds a majority stake in Israel’s newly privatized stock exchange.
As a foreign investor, here to make money, Manikay obviously seeks to maximize the TASE’s profits. To that end, via the bourse, it is using lobbyists to pressure politicians to improve its profitability. How? By obtaining a tax exemption for the stock exchange.
At the moment it seems like the bourse’s lobbying, which has the backing of the Israel Security Authority, is succeeding. The head of the National Economic Council, Prof. Avi Simchon, was asked by Prime Minister Benjamin Netanyahu to look into exempting investments on the stock exchange from tax, and it looks as if Netanyahu is inclined to agree with the proposal.
While this is ostensibly an exemption for stock exchange investors, in practice it’s an exemption for Manikay and its Australian shareholders: A tax exemption that encourages activity and profit on the TASE will ultimately benefit them.
So why do we want to hand the Australians a cash gift? The answer lies with the prime minister’s mindset. They’re seeking an exemption from the 25% capital gains tax on profits of up to 60,000 shekels ($16,470) a year. Not by chance, rental income of up to 60,000 shekels a year (5,000 shekels a month) is also tax-exempt, and that is also the justification for the exemption: If real estate investors get 60,000 shekels in tax-free income, there’s no reason to discriminate against stock investors.
This argument gets backing given the speculative excitement in the real estate market, compared with the stock exchange, which for years has been languishing in reduced volumes. Equalizing the tax burden is said to be a way to reignite stock investors’ interest (and also help lower housing prices along the way). By all appearances, the perfect move for all.
And there’s another consideration — it’s an election year, and Netanyahu would love to come off as someone who lowers taxes. Perfect for everyone, including the prime minister.
But all these justifications are easily refuted. First, the tax exemption on rental income is misplaced and distorts the investment considerations in the housing market, exacerbating Israel’s housing crisis and ultimately serving as a gift for the rich — those with enough money to own an apartment as an investment. The right step would be to cancel the tax exemption on rental income, and not to make the same mistake again with income from investing in the stock marker.
Second, this would be an entirely regressive move, as it would only benefit the very rich. Given today’s returns, profits of 60,000 shekels a year on the stock exchange mean holding a portfolio worth 1 million shekels or more, and how many people in Israel have such a large investment portfolio? Only the very richest. In other words, Netanyahu would be granting a gift to the very rich — leaving their tax exemption on rental income in place, and giving them an additional exemption on stock income.
Third, a large portion of the benefit would go to wealthy Australians, of all people, as well as a few other foreign stakeholders. They’ll be the main beneficiaries if the TASE emerges from its slumber thanks to an aggressive tax benefit.
Fourth, it’s not clear why it’s a national interest to divert money into the TASE. The stock exchange is overwhelmed with money as it is. Liquidity is the last of its problems, and the money flowing in would be primarily from Israeli pension funds. Why is it a national interest to further increase Israelis’ exposure to the stock market and encourage speculation in shares?
Fifth, it’s also entirely unclear whether a tax exemption would bring money from the housing market into the TASE: Speculative investment in housing is fed by low interest rates, making this the most accessible leveraged private investment. The fact that you need very little cash to buy a relatively expensive apartment, thanks to cheap mortgages, is the magic behind property investments, and the proposed tax exemption won’t change this.
Sixth, this is a tax exemption that’s easy to exploit. It’s not too early to say that the wealthy, those who have stock portfolios worth millions of shekels, will have no trouble splitting them up in order to maximize their ability to use the 60,000-shekel exemption.
In short, the state stands to lose significant income, most likely hundreds of millions of shekels, and it will all go to a handful of rich people, Israelis and Australians, without the Israeli economy benefiting in any way.
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