Taking Stock / Meet the Taxpayer

"Finance Minister Silvan Shalom deliberately lied. Over the last couple of months, I warned again and again that there was a vast discrepancy between revenues and budget expenditure, totaling some NIS 10-15 billion. It was crystal clear that the finance minister was playing with tax refunds and payments, and that it was all a scam ahead of the elections." (Former finance minister Avraham Shochat, in an interview to Ynet on Sunday.)

True enough. It is highly likely that Finance Minister Silvan Shalom, abetted by his top officials, hoodwinked the public into believing the treasury met the government's deficit target for 2002. Accountant General Nir Gilad, who spearheaded the treasury's moves, has yet to offer convincing explanations for the yawning deficit that appeared in January 2003.

But while Shochat skewered Shalom, we couldn't help but recall a couple of columns that appeared in Ha'aretz back in January and June of 1996 called "Shochat's empty issues." Shochat has little to learn from Shalom's financial acrobatics. He knows the ropes perfectly well himself.

In February 1996, the treasury presented a huge deficit of NIS 1.5 billion for the previous month, whereas the government usually posts a surplus for January. Then, too, suspicions arose that the real reason for the January slide was that spending had been rolled over from 1995 to January 1996, to allow Shochat to claim he'd met the 1995 deficit target, which had been 3.5 percent of GDP.

Shalom's sin is graver, you may be frowning, because he pulled his trick right before national elections. But so did Shochat; he did the same before the 1996 elections. In early July, a few days after the elections, when the treasury published the data for June, it transpired that the deficit had suddenly ballooned to NIS 2.3 billion. Then, too, the accountant general was sent out there to field questions, and attributed the entire hole to one-time expenditures.

A top treasury official from Shochat's reign confirmed the whole thing last week. No, Silvan Shalom and Nir Gilad didn't invent creative accounting; we did it too, he admitted. "The only difference is that this time, the amounts in question are much bigger, because with Silvan Shalom everything is done big and blatant," he said.

There is another difference, of rather more significance, between the accounting acrobatics of 1996 and those of 2003. This time, the budget crisis is much more serious, and the price these gambits will cost is much more painful.

The year 2003 is starting with a budget that is truly a unique animal. It is a budget that all the treasury officials, all the business leaders and all the analysts agree is utterly irrelevant. Some think it missed the mark by NIS 10 billion; others think the budget is NIS 20 billion off from meeting its goals.

The problem with the 2003 budget begins with its outlay, starting from costs rolled over from last year to the defense budget conundrum (Was it really cut by NIS 6 billion? Or was that just the appearance wink-wink of a cut?)

The unknown parameter

But the biggest unknown parameter is in the revenues column: How far will actual tax collection be from predicted tax collection.

This week, Dr Avi Alter, a member of the tax reform panel headed by CPA Yair Rabinovitch, mentioned another great big hole lurking in the 2003 collection forecast - tens of thousands of high earners who routed their salaries to newly-registered companies in order to pay less National Insurance and Health Tax. Instead of gaining more tax by abolishing the ceiling on National Insurance and Health Tax, the treasury is likely to wind up with much less.

Alter estimates that particular gambit cost the treasury NIS 3.2 billion from the group of high-earners, which are its principal source of tax wealth. The logic is simple. Many of the taxpayers who set up shell companies will reduce their capital withdrawals from these companies as far as possible. They will leave as much money as possible within the companies. Many will thus reduce their tax rate from 64 to 36 percent.

Abolishing the ceiling on National Insurance and Health Tax was one of the treasury's most egregious mistakes because it inflicted long-term damage. The treasury shoved tens of thousands of its best taxpayers into the circle of tax dodgers. The chance of them renouncing their newfound practice and starting to pay full tax again is vanishingly small.

The finance minister is still waving his slogan of "taxing the rich," but the truth is the dead opposite. The wealthy have always evaded tax in Israel; but now, thanks to the treasury abolishing the cap on National Insurance and Health Tax, they've been joined by the self-employed and strongest salaried workers.

Which leaves who exactly to pay tax? It leaves the people who don't earn enough to justify registering a company, or people who can't afford to launch a company because it would impact on various benefits if they were to forgo their employment relations.

The forecast for 2003 is simple. Less people will pay more tax; collection as a whole will continue to deteriorate fast; the economic crisis will intensify; interest rates will remain high; and the herd dubbed "Israel's economic leaders" will continue to amble from one cocktail party and emergency conference to another.