Opinion

What Do Trump and Kahlon Have in Common? Good Politics, Bad Economics

Both are dead wrong about taxes but at least the Israeli finance minister isn't talking nonsense about spurring growth

Moshe Kahlon
Mark Israel Salem

When it comes to the inevitability of taxes, America and Israel couldn't be more different.

Cutting taxes is dogma for the Republican Party, no matter what the consequences, and even liberals will do anything to avoid being labeled with the words “tax-and-spend”. There are lobbies and think-tanks dedicated to tax policy and no shortage of cranks who hold out in the wilderness to escape paying them, or insist that the income tax is unconstitutional.

Meanwhile, in Israel, even after a couple of decades of privatization, deregulation and declining social spending, we’ve never shaken off the belief that government is good and deserves the taxes it collects. Successive finance ministers have actually cut rates, but far from being lauded as taxpayer heroes, their efforts have been largely ignored. When they cut spending, they get slammed; when they raise it, there’s no interest group there to asking why we need to pay for it.

The contrast couldn’t be any more stark than it has the last few weeks.

Tax cut who?

The Trump tax-cut plan has been the subject of angry debate. Columnists write about it, economists analyze it.

Over here, my guess is that most Israelis aren’t even aware that Finance Minister Moshe Kahlon is planning tax cuts of his own. He announced them almost a month ago, yetthe discussion has been confined to officials.

Okay, Kahlon’s are a lot more modest, adding up to a few billion shekels, while the GOP plan will cut reduce taxes by $1.5 trillion over 10 years. But there's no no good reason for cutting taxes at all in either case.

Both countries are low-tax economies. Only about 26% of U.S. gross domestic product goes to paying taxes and in Israel the figure is 31.2%, at the bottom half of countries that belong to the Organization for Economic Cooperation and Development. Moreover, in both Israel and the U.S., the tax burden has shrunk over the last two decades, while in most OECD countries, it has grown.

Meanwhile, American and Israel are enjoying strong economic growth, indeed so strong that a tax cut won’t be able to add much.  Both economies are operating at capacity, or close to it, and unemployment is low. The money taxpayers save isn’t going to significantly spur investment or spending, and to the extent it does, it will feed inflation and cause interest rates to climb, eating up the impact of any tax benefits.

In America’s case, the risk is extremely high because the idea that tax cuts pay for themselves by spurring growth is a myth. The government will run up huge deficits and borrow more to pay for the tax cuts. Israel doesn’t face the same fiscal constraints but you have to be very bullish on the economic outlook to assume the tax windfall will continue indefinitely, and that we won’t fund ourselves coping with a sudden deficit surge.

Bang! 

When Trump promises that tax cuts will set off an explosion of economic growth, he doesn't mention that business doesn’t just look at its tax bill when it decides to invest, but the quality of its workforce and demand for its products and services. No business will build a new factory if the hiring pool is filled with semi-literate, opiate-addicted workers who can’t afford the products it’s going to manufacture.

America and Israel should be using their tax money to address their very real problems in health, education, infrastructure and income inequality, all of which require government intervention and spending. 

In America’s case, for instance, life expectancy was 1.5 years above the OECD average in 1960; now it’s one year below the average of 80. Israel is two years above the OECD average, but our population is aging, which will require investment in more doctors and hospitals.

In student skills, both countries are near the bottom of the class, ranking 25th and 31st out of 28 OECD-surveyed countries, and both countries have levels of poverty and income inequality akin to less-developed economies.

Kahon at least can claim that he’s got the money to give due to a tax-collection windfall  that adds up to about 17 billion shekels ($4.9 billion ) this year. Mind you, that’s 17 billion in unexpected revenue, not a budget surplus.

Nevertheless, he rightly asks, why not give the money back to ordinary people?

At least he doesn’t pretend, unlike America’s Republicans, that he’s going to create a surge of economic growth. Moreover, his tax cuts are focused on the middle class, i.e., those earning over 11,000 shekels a month, not to the 1% on the promise it will trickle down to everyone else.

But for both Kahlon and Trump, the urge to cut is political, not economic.

Having failed to pass any other significant legislation in the past year, tax legislation is Trump's last chance to avoid humiliation. For Kahlon, it’s a function of his populist short-termism that tries to deliver accomplishments like lower housing prices quickly rather than thoughtfully. In both cases, however, their good politics spell bad economics.