Where Is Israel's Tax Abolitionist Party?

In 1984, Yaakov Berger's anti-tax party had the right idea. High taxes are the kiss of death for investment and growth.

Moti Milrod

During the 1984 elections a party called Has Mas, headed by Yaakov Berger, ran for Knesset on a single-issue platform: abolishing the income tax.

Granted, the idea was somewhat delusional but the general direction was correct. We pay too much tax. The government sticks its hands too deeply into our pockets.

We don’t want to pay for an electrician and cleaning services at Prime Minister Benjamin Netanyahu’s private villa in Caesarea, but neither do we want to pay for the surplus of clerks and inflated expenditures at many government offices.

But miracles do happen: In the current elections, all the parties are drawing closer to Has Mas. Netanyahu is promising to cut taxes. Manuel Trajtenberg of the Zionist Union says they shouldn’t be raised. Moshe Kahlon of Kulanu promises he won’t raise them, and so does Yair Lapid of Yesh Atid.

So ostensibly, there’s no problem whatsoever. But I’m still worried - because once the new finance minister gets past all the campaign promises, he’ll be forced to either cut spending or raise taxes.

Cutting spending is hard. Pressure groups always fight against it. Raising taxes is easier.

Bank of Israel Gov. Karnit Flug supports raising taxes. She doesn’t believe in streamlining the public sector and cutting expenditures.

She was always like that. She opposed the economic plan of 2003, which included tax cuts. Yet that plan produced growth of 5% a year, a sharp decline in unemployment, and higher tax revenue despite the lower tax rates, thanks to a sharp rise in economic activity.

Flug argues that our tax rates are low compared with other Western countries, but her comparison is misleading. We have very high tax rates, on income and corporations as well as value-added tax and capital-gains tax. Everyone who pays them knows this.

But we also have many tax exemptions, like low corporate tax rates for large companies and exporters, no VAT on fruits and vegetables and no VAT at all in the tourist city of Eilat, and tax breaks on professional training funds and similar investment vehicles.

So the result is that the privileged pay little tax, but most Israelis - and all small and medium-sized businesses - pay through the nose. And that’s what matters. That’s what hurts our economy.

High taxes are the kiss of death for investment and growth. We live in an open world, where businesses, workers and investors can move abroad at any moment, and high taxes drive them away from here.

The facts are clear. From 2004 to 2011, we were at the height of a tax-cutting process. The economy responded with rapid growth, falling unemployment and high tax revenue, which could be used for social programs.

But all that changed in 2011, when a new fiscal rule prompted greatly increased government spending. Add to this the 2011 social-justice protests, which led to tax hikes in every possible field.

In July 2012, taxes were raised again and ditto in the 2013-14 budget. These tax hikes totaled some 30 billion shekels ($7.8 billion) a year. This is an extremely heavy tax burden.

The results weren’t long in coming: Starting in 2012, growth rates declined sharply, budget deficits ballooned, investment dropped and our credit-rating outlook worsened. And all because the laws of economics hold true: Higher taxes drive away investors, and fewer investors mean lower growth, wider deficits and less public benefit.

In 1984, only 1,472 people voted for Has Mas. But where is Yaakov Berger now that we need him?