Analysis

Is Israel's Economic Inequality Caused by Too Many Rich, or Too Many Poor?

Israel suffers high levels of economic inequality, and a treasury economist found that the problem stems not from growing numbers of poor but the wealthiest waxing even richer

Israel has failed to tackle the problems of poverty and social inequality. The picture shows the mattress and bedding of a homeless person on a sidewalk in front of thedisplay windows of a trendy clothing store,
Moti Milrod

Are social disparities a source for concern?

The question may sound like something out of the mouths of supporters of the Tea Party movement in the United States, with their highly conservative, right-wing economic views. After all, it’s clear to everyone else that social disparities are indeed a source for concern.

Angel Gurria, the secretary general of the Organization for Economic Cooperation and Development, the grouping of the world’s developed economies, frequently says that it’s the social disparities more than poverty that are worrying, because they are a source of social instability. It’s well known that social revolutions have always been led by embittered members of the bourgeoisie and not by the poor.

Nevertheless, the question of whether inequality is a source of concern cannot be dismissed as self-evident. It demands in-depth consideration, particularly in light of the disturbing finding by Moran Moshe-Jantzis of the Finance Ministry’s chief economist’s office, who last month released an analysis of the sources of inequality in the country.

Her analysis focused not on the scope of the inequality, which in Israel is among the highest in the developed world (seventh from the top), but rather its source. The question, in other words, is whether it stems from growth in the numbers of miserably poor people or growth in the number of super-rich.

The importance of the question lies in the fact that these are two totally different aspects of inequality. If it is a result of growing numbers of poor people, then the government needs to direct its attention to a war on poverty. If, on the other hand, the problem growing numbers of very wealthy people, then policy needs to be very different - and it will also be controversial.

To answer the question, Moshe-Jantzis used an innovative method of measurement that was developed by the OECD. It attempts to identify from which direction the inequality is coming, the weak or the strong. We can start with the spoiler, and state from the outset that Moshe-Jantzis found that the major portion of the problem in Israel is the result of the growth of the very wealthy rather than the poor.

Income inequality in relation to the nationwide level is a more severe within the highest deciles than it is within the lower ones. To refine her findings, Moshe-Jantzis looked at inequality only among the highest-income deciles and found there a high degree of equality and that the divergence in inequality was all in the wealthiest 10% of the population. In light of that, she delved in greater detail into the situation among that top 10%, and found that the major wealth was to be found among a much more limited group – the top 1%.

The most prominent finding from the study, therefore, is that a large part of the inequality in Israel comes from the top 1% of the population alone. That top tier is cut off from the other 99% of the country. If it reminds readers of America’s “We are the 99%” protest, in which the middle class protested the huge disparities between themselves and the top 1% in the United States, they are right. It’s precisely the same social phenomenon in Israel too.

Poverty isn’t Israel’s only problem

International comparisons that Moshe-Jantzis made show that the 99% in this country really do have a lot in common with their counterparts in the United States, although the situation in Israel is not quite as bad.

The inequality stemming from the top 1% here is somewhat less extreme. On the other hand, when you compare Israel to countries in Europe such as Denmark and France, you see the problem in Israel with full force.

Israel’s inequality problem is a lot worse than Denmark’s not only on the side of the well-off, but also on the side of the poor. In comparison to France, poverty in Israel is much worse, but when it comes to having wealth that is out of proportion to that held by the rest of society, Israel’s rich doesn’t come off badly compared to France’s. The problem of the 99% in France is the same as in Israel.

Moshe-Jantzis found that if you exclude the top 1% of Israeli society, inequality is vastly less severe. As measured by the accepted gauge of inequality, the Gini coefficient, Israel drops from a 37 point measure of inequality to 34. That is still high, meaning that even without the top 1%, there is considerable wealth inequality among Israelis, but it is less severe without the 1%.

The revelation that the 99% problem is affecting Israel with full force too is new. Up until now, policy makers were set in the view that our problem was a growing number of poor people, particularly Israeli Arabs and ultra-Orthodox Jews, and not a growth in the numbers of super-rich. Israel does have a serious problem when it comes to growing numbers of poor, and the war on poverty in Israel is essential, but there is also a serious problem of inequality related to the top 1%. The big question is what to do about it, and one might even ask whether it really is a problem.

In contrast to the growth in the number of poor, a social problem that any welfare state would want to eradicate, the growth of the wealthy is not necessarily a problem. On the contrary, countries that encourage an open economy want to see their citizens getting richer, and the more the better.

The growth of the number of wealthy citizens is only a problem in two respects. The first involves the issue of disparity and whether it engenders a feeling of injustice and creates instability among the middle class. That is what the OECD’s Gurria is getting at when he talks about disparity being more of a concern than poverty, but one might also argue that if the disparities are the result of talent and individual initiative, the government has no reason to be opposed.

Senior economists frequently say the problem of inequality can be solved by throwing high-tech out the window and ask if that is what the Israeli government wants to achieve. Social activists would of course reply that high-tech entrepreneurs don’t want to live in a country that is unstable and where the population labors under a sense of injustice.

The second question regarding the high concentration of wealth among the few is the source of their fortune – whether it is the result of the talents of industrious entrepreneurs, or the product of an economy with a high concentration of economic power and little competition, where a handful of players reap monopolistic windfalls with which to line their pockets. Moshe-Jantzis’ analysis does not answer that question.

Greater taxation of the 1%

In any event, these two questions raise the issue of what policy Israel should adopt, if any, to address the situation. What’s necessary is a continued battle against concentration of economic power and monopolies to prevent the few from reaping huge profits at the expense of the many. Another policy that should be considered is greater taxation of the very rich, on the assumption that the disparities (even if they are the result of individual initiative) cause a problem.

This is controversial, because many people don’t believe it is a problem when people get rich as a result of their own initiative and talent, and also because it would be difficult to tax the wealthy at a higher level than they are now being taxed. The top tax rate in Israel is not low by international standards, and the taxes that Israeli authorities might consider levying are on capital, such as inheritance and capital gains. But in the era of a global economy in which countries are competing against one another to reduce corporate taxes and taxation of capital, Israel’s ability to pursue tax increases on capital is very limited.

In any event, it is difficult to suggest a clear policy that could deal with the problem of disparities of wealth among the rich, other than higher taxes, so that at least the other 99% of us would also benefit and maybe also manage to become successful high-tech entrepreneurs ourselves.