Why Can't Israel End Tax Breaks for the Rich?

Eliminating their tax breaks would spare the nation a lot of tax hikes and budget cuts.

Let's be clear: The 2013 budget is NIS 30 billion short.

Half of that amount will have to be made up through budget cuts. The other half will come from tax increases.

That's the real deal of the budget figures, and if Israel wants to get through the global financial crisis in one piece, there are no alternatives.

That said, they could be carried out more wisely.

Let's start with the tax increases. The state needs another NIS 16 billion to NIS 18 billion in tax revenues. That's a huge amount, and it necessitates raising taxes, as indeed is being done.

But most of that sum could be raised relatively easily - simply by doing away with tax breaks.

This year, the state is granting NIS 40 billion in tax breaks, according to the Finance Ministry's State Revenue Administration - that's much more than the shortfall the state needs to make up. It's equal to about 17% of the state's total tax revenue, and a full 4.3% of the GDP. All these tax breaks were given with the best of intentions, but they add up to a breathtaking sum that does grave damage to the state budget and the tax system.

Tax credits make life very difficult for the collection system, force the authorities to waste time and money on enforcement and collection, improve the lot mainly of the well-off, and let the state toss around money without oversight. "Tax benefits indeed improve the lot of their recipients, but they shift the burden onto the rest of society," wrote the State Revenue Administration in its annual report, which called on the government to cut these benefits as part of its tax reform. If the state were to do away with all tax breaks, then income tax could be cut by about 15% for all citizens, the administration calculated.

Mind you, that number isn't precise. Some tax breaks are counted as such purely for technical reasons. For instance, capital gains tax is considered the country's second-largest tax break, but that's only because at 25% to 30%, it's amounts to less than the tax on labor, which can reach marginal rates of as much as 50%. In most places, these taxes are totally different issues.

Other tax breaks are fully justified, such as the exemption on pension savings and on government-paid stipends. When you discount all these justified exemptions, you're still left with NIS 10 billion in tax breaks that we should consider dropping altogether.

This NIS 10 billion isn't just money that the government needs now, it's largely money that goes to the rich and well-connected. Take for instance the exemption on provident funds, worth NIS 4 billion a year. This is the last existing exemption for savings that aren't pension savings, while provident funds no longer serve their original purpose - enabling employees to enhance their education or skills. Only 37% of employees have provident funds, and 81% of them are from the highest-paid decile, according to State Revenue Administration figures.