Yachimovich Proposing Estate Tax on Large Inheritances

It's a win-win: The heirs stay rich, but social gaps narrow, MK says.

Inheriting more than NIS 15 million could wind up costing heirs 5% to 12.5% in estate tax, if a bill proposed on Monday by MK Shelly Yachimovich is enacted into law.

Yachimovich, chairwoman of the Labor Party, put the bill together in consultation with tax experts who are also former Finance Ministry officials. It's far from the first time estate tax has been proposed: The last was in January 2011, by Yachimovich together with MK Marina Solodkin of Kadima (The coalition shot it down ). But Yachimovich believes the time is right because the public has come to feel the social gaps to be intolerable, she explained.

Shelly Yachimovich - Hagai Frid
Hagai Frid

"The way things are, with estates completely exempt from tax, cannot go on," Yachimovich wrote in her proposal on Monday. She proposes to tax only big inheritances, not to increase the burden of the middle class where parents might want to leave an apartment or provident fund to the kids, she wrote.

"The bill is logical and trivial," she wrote. Much of the inequality in Israel is due to wealth passing from generation to generation, she elaborated. (So does poverty, she added. )

In the United States, none other than the formerly richest man in the world, investor extraordinaire Warren Buffett, campaigned to increase estate tax as a curb to the development of "dynastic wealth," Yachimovich pointed out.

Moving on from the oracle of Omaha back to Israel, it's one of the only developed countries that has no form of estate tax, Yachimovich wrote. In the United States and Europe it's been around for over a century.

In fact, Israel used to have it, but the law was repealed in 1981, mainly because of the hyperinflation raging at the time, which eroded inheritances at light speed. Yet there was no clause to reinstate the tax when the economy stabilized, she said.

Proposals have been tabled one after another since then, but were foiled by vested interests, Yachimovich said.

Her proposal would, among other things, reduce inequality and increase the state's sources, Yachimovich said - without anyone paying a price for it.

The tax would be clipped from people already in the next world, and only from big estates: In any case the bite would be small, leaving the heirs still rich, she explained the logic.

"This is the most progressive tax imaginable," Yachimovich summed up. "Therefore, it is also the most just, economic, and moral altogether."

Failure to report an inheritance would cost the heir a NIS 50,000 fine, Yachimovich proposes. Deliberately delivering false information would cost a NIS 125,000 fine, one year in jail, or both.

When the state is the heir - be the recipient a local company, the Jewish National Fund or any public institution - no tax would be owed, Yachimovich says.

The kids get billions, the people get none

Yachimovich's proposal has mechanisms to prevent heirs from being dunned for tax out of their own assets.

The absence of Israel's estate tax can be said to have shaped the country. The departed billionaire Ted Arison returned to Israel at age 65, having left after his army service, in part because his children wouldn't have to share his estate with the taxman. He is believed to have left $10 billion, of which the state got none, at least not from estate tax.

The late Yuli Ofer, who passed on last year, left his children NIS 3 billion. It is not known how much his late brother Sami Ofer left behind when he also died last year, but estimates range anywhere from NIS 4 billion to NIS 10 billion. The state got none. If a tax had been in place, the state would have received hundreds of millions of shekels.

How much the state stands to gain if Yachimovich's proposal is enacted cannot be reasonably projected. Twelve years ago a public committee headed by economist Avi Ben-Bassat proposed a 10% estate tax and projected resultant tax revenues of NIS 1.6 billion a year. Since then, Israel's economy has grown, inequality has widened and the rich have grown richer.

Precedent in other nations, though, is that estate tax increases tax revenues by about 1% of tax revenue. So if annual tax revenue is about NIS 220 billion a year, the state would make a few billion shekels a year from estate tax, depending on the success of collection.

Estate tax would also resound in these days of "social justice" protests, which may be primarily about the cost of living - but which have also targeted the so-called "tycoons," the layer of super-rich Israelis that has developed in the last decade. In a sense, estate tax helps reshuffle the economic cards to a degree and could therefore boost social mobility (the ability to rise in social class ), which, according to academic studies, has been declining in Israel.