Taking Stock / Death of Doomsday Scenarios

Was that a wail of despair? No? Did you hear hearts breaking, prophecies of doom? No? What about warnings or at least some invective?

In fact, in the 96 hours since TheMarker broke the news that the treasury is considering raising capital gains tax from 15 to 20 percent, nothing has happened. Capital market players haven't sunk to their knees beating their breasts. They haven't marched on the Knesset, and in fact, the stock market indexes reached record heights.

You could dismiss the pervasive unconcern by saying everybody knows the leak was just a trial balloon. The treasury won't really raise taxes now; the finance minister wouldn't dream of shackling the stock market just as it's booming, fueling the entire business sector.

But that's no explanation. It wasn't that long ago when the stock market panicked every time the mere thought of a capital gains tax arose in treasury corridors, and leaked to the press.

It was still happening in the late 1990s. At the whisper of thought about capital gains tax, brokers would bawl, big business would rear up, and lobbyists would be unleashed without delay, with the clear mission of petrifying the public and treasury alike.

Seasoned business journalists remember how the biggest corporate powers on the stock market led the attack on paper for supporting tax on capital gains.

"You don't understand the magnitude of the danger," they said. "It will destroy the Israeli capital market. It is the end of fundraising on the market. This isn't America: the Tel Aviv Stock Exchange will never recover if capital gains tax is imposed. Speculators will never touch another stock again. They won't want to lock horns with the Income Tax Authority, and without them, the whole market will wither. You're killing the capital market."

Discovering that the trend was moving against them, they changed tactics. "In principle, taxing capital gains is right," they agreed. "Devil of it is, it can't be done. Until everybody has to file tax returns in Israel, you can't collect capital gains tax."

More than two years have passed since capital gains tax was imposed, and there's no argument: it is a stunning success. The tax is being collected for the greater good, and meanwhile, the stock market is booming, the number of investors is constantly growing, and the market is deeper, more diversified and more liquid than ever before. In fact, it's tough to single out any significant problem on the market.

Naturally, none of this happened in a vacuum. The momentum was spurred by the U.S. loan guarantees and interest rate cuts. But it's crystal clear by now that slapping tax on capital gains succeeded mainly because it was the right thing to do.

The success of capital gains tax has become so taken for granted that we have tended to forget the weighty public debate lasting some 12 years, from the first time it was considered until its enactment.

In fact, Israeli history is riddled with reforms that were a stunning success once they overcame the vehement opposition of narrow-interest parties.

They threaten, they paint nightmare scenarios, they delay and drag their feet and recruit lobbyists and analysts whose real job is to overpower the reformers.

And when the reform approaches nonetheless, they whip out the ultimate claim: it's being designed by know-nothing academics and bureaucrats who never bought or sold a shoelace, and wouldn't recognize business if it bit them on the leg.

But reality has proved otherwise. The tax reform was as successful as the great forex reform, for instance. Why not take another look at that.

Eight years ago, the Bank of Israel and Finance Ministry abolished all restrictions on removing capital from Israel. Cries reverberated up and down the land and in the press, warning of a massive impending capital flight. One paper went as far as publishing a double-page spread forecasting the full horror - of every other Israeli depositing his money in banks from Europe to New York, anywhere but here.

In reality, the opposite happened. The liberalization of the forex market didn't cause capital to flee; it attracted an unprecedented wave of foreign investment. Foreign money came into places that had never seen it before.

But the success of the forex and capital gains tax reforms hasn't impressed Israel's stock market chiefs. A year ago, they commenced a terror campaign when the treasury decided to equate tax on gains made locally and abroad.

Sam Bronfeld, the general manager of the Tel Aviv Stock Exchange, is a perfectly serious, sincere economist, yet he lost his head for a moment there, moaning that billions of shekels would abandon the TASE as the provident funds invested abroad.

The treasurymen did take fright, and gave Bronfeld and his colleagues another year to "prepare." Not that it did - it did nothing, yet four months ago tax parity arrived.

And what happened? Did institutionals withdraw billions of shekels from Israeli investments and send the money abroad? Did the TASE crash, did shocks ripple throughout the system? No, no, no and no.

The lesson of these three examples is clear: the basic laws of economics work. We don't need unconventional economic medicines, because the conventional ones work perfectly well.

The utter silence that greeted the report of the great capital gains tax hike to 20 percent shows that maybe something has changed after all. Not only in our macroeconomic management, but in business circles as well.

If the treasury comes up with a sensible plan of proven economic logic, then no panic should ensue.