Where the Shekel Stops / The Math of the Tent Protesters' Demands: Mistakes Amounting to Billions

The letter, published Tuesday, is a compilation of the protest movement's demands of the government.

The letter of demands compiled by the tent protesters is riddled with mistakes that amount to tens of billions of shekels, according to an analysis by TheMarker.

The letter, published Tuesday, is a compilation of the protest movement's demands of the government. It includes a great many demands of the national budget and details how they could be financed through tax increases.

Social protests
Nir Keidar

The document's authors state that the total cost of their demands is NIS 36.6 billion and that the tax increases they propose would amount to NIS 38 billion. Ergo, all their demands could comfortably be met and the government would still have an extra NIS 1.5 billion, according to their math.

Their demands include: renewing public housing (the government builds apartments through the Amidar corporation and rents or sells them to the poor ) at a cost of NIS 2.6 billion, according to the protesters; extending free preschool so it starts from the age of 3 months (NIS 8 billion ); reducing the number of children in classrooms to the OECD norm of 21.4 (NIS 3 billion in four years ); meeting all the Israel Medical Association's demands (NIS 3 billion ); increasing the number of police officers and firefighters per capita to OECD standards (NIS 1.5 billion ); increasing the number of social workers and teachers per capita to OECD standards (NIS 1.5 billion over a decade ); raising the minimum wage to 50% of the average wage (NIS 1.5 billion ); creating employment centers in the country's outskirts (NIS 1 billion ); and adding 500 inspectors to enforce labor laws.

All these demands, which the protesters calculate will cost NIS 36.6 billion a year, they propose to finance through profound tax reform. For instance, they advocate lowering VAT from 16% to 5% (over four years; they claim this will cost NIS 15 billion ), while increasing income tax (adding NIS 22 billion ). They propose instituting income tax on all income (a highly amorphous proposal - they apparently mean abolishing discount tax rates on capital gains and interest gains ) - which they say will add NIS 6 billion a year. They propose that extra tax income be used to increase the state budget (NIS 10 billion ). All in all, they calculate that these changes would add NIS 38 billion to finance their demands.

But TheMarker checked the figures with the Finance Ministry and external experts and found that many of the numbers are completely wrong.

Imaginary money

First of all, lowering VAT from 16% to 5% wouldn't cost NIS 15 billion. It would cost NIS 40 billion. By the way, in no country in the world is VAT that low. Most European nations charge VAT of 15% to 25%. Minus various exemptions, the average VAT rate in Europe is 13%. In other words, VAT in Israel is only slightly higher than the norm in Europe.

Let us also remember that VAT is a burden shared by all members of society, so its reduction would help mainly the people who consume the most - the well-off. The Bank of Israel found in 2005 that for each 1% lopped off VAT, the lowest-earning tenth of the population gets 5.7%, while the highest-earning tenth gets 17.1%.

In other words, lowering VAT helps the strongest, not the weakest. It's also true, however, that when looking at how much people spend on VAT out of their income, the poorest are the hardest hit because they spend a greater proportion of their income on consumption.

The protesters' calculations of how much the state would get by raising taxes are also wrong. If the government suspends its plans to lower corporate and income tax and increase the tax on the highest earners, say, raising it to 50%, the state would gain NIS 15 billion, not NIS 22 billion, say the experts.

The calculation of lost income from low tax rates on capital gains and interest, NIS 6 billion, is taken from the Finance Ministry's State Revenue Administration. But that department warns that the calculation is theoretical, and in practice, income from these sources could not reach NIS 6 billion a year.

The proposal that surplus tax collection of NIS 10 billion a year be used to increase the budget is ludicrous. The state perennially runs a budget deficit. Any "surplus tax collection" is relative to projected income from tax, which is estimated at the start of the year. The state budget is based in part on that projection of tax income. The "surplus" is relative to a forecast; meanwhile, the government is operating on a deficit and issues bonds to finance it.

Therefore - "surplus tax" is theoretical, not money that can be spent. Also, the protesters' math completely ignores the state's need to repay debt and reduce the national debt. Diverting "surplus tax collection" for budget spending, not debt repayment, would mean sacrificing our children's future and imperiling Israel's very financial stability.

The upshot is that the protesters' claim they have found budget sources to finance all their demands is nonsense. Their solutions would increase direct tax by NIS 20 billion and lower indirect tax by NIS 40 billion. On the spot Israel would suffer a revenue deficit of NIS 20 billion. Now add to that demands of another NIS 20 billion. What the tent dwellers propose would create a gap of NIS 40 billion in the state budget.

How not to reform education

Some of the protesters' demands themselves raise eyebrows. Fewer pupils per classroom? Studies show that this in itself achieves nothing and that education reform shouldn't focus on the number of children per class. As for setting teacher numbers according to the OECD average - no study has been done showing that Israel suffers from a lack of teachers.

As for raising the minimum wage to half the average wage - it already is.

Adding more positions and beds to the healthcare system - this is already being done, in part. The argument with the Israel Medical Association at present is about pay, not positions.

And on top of all that, one might note that the most important social assistance Israel can provide to its citizens, a central issue in the OECD recommendations on how Israel could improve its social policies, isn't even on the protesters' list. That assistance is helping the lowest earners through negative income tax. Today the state earmarks about a billion shekels a year for that, no more. The OECD thinks the figure should be far higher.