Taking Stock / Your Tax Bill and Jerusalem's Secrets

Tameoin. It's a Greek word that loosely translates as "secret room" and even more loosely, as "the government's treasury," the hiding place where kings and princes, or prime ministers for that matter, pile up the funds they collect from the subjects. That money collected from you might as well be a secret room for all the say you'll have in its use. But based on the annual Tax Revenue report released last week, the treasury feels that economic policy should support tax cuts in order to bolster economic growth.

Most economists accept that the tax reforms in recent years do encourage economic growth, and mainly, that they were inevitable given globalization and Israel's need to compete for a share of human and financial capital. But not everybody is starry-eyed about our economy or the directives of globalization and competitiveness. They see the tax cuts as just another way for the elites controlling the treasury and business sector to benefit the highest earners.

Yet actually perusing the tables and statistics, the Tax Revenue report shows that the devil lies in the details, as always. Behind the headlines blaring about tax cuts lies a complex reality.

Benjamin Netanyahu loves to describe, with his trademark choppy gestures, how he reduced the tax burden weighing on the People of Israel and stimulated economic growth. He's right, too. He did lower taxes. But what he doesn't always remember to mention is that even after his tax cuts, the tax burden weighing on the people remains onerous. In fact, last year taxes in Israel had returned to their level of 10 years before.

How's that? Simple. When the economy booms, taxes tend to rise faster. Some of the increase in taxes during the last three years may be an episode that will pass come the next economic downturn. But the main reason the tax burden hasn't dropped one iota in 10 years is that with one hand the state lowers income tax, and with the other hand, it raises health tax and National Insurance Institute payments.

In the last 20 years the state has kicked up the ceiling for NII dues three times. In 1986, the ceiling (beyond which NII payments stop rising) was raised to three times the average wage. In 1995 it was lifted to four times the average wage and in 2000, to five times the average wage.

In July 2002, the ceiling was abolished altogether, only to be reinstated a year later as high earners flocked to tax shelters (through setting up fictitious companies) to dodge NII payments.

As for healthcare tax, the government exploited the Health Tax law to reduce its share of funding the national healthcare systems at the taxpayers' expense. That added the equivalent of 0.5 percent of GDP to the public's tax burden.

Not only have Israeli taxes maintained for a decade, the tax rates are high by international standards, too. Recent reports might state otherwise, but the truth screams from the little details.

First of all, Israeli tax levels look low only when compared with the European Union nations. But the European Union nations are characterized not only by relatively high tax, but by more prosperity and much higher standards of living than we have here; and they also boast far richer pension and welfare schemes, and stronger social safety nets. In other words, much of that high tax goes back to the people in their hour of need.

When Israel is compared with the OECD nations, meaning the collective of the developed nations, including the less prosperous and satiated, the picture changes radically. The tax burden in Israel is higher by 5 percentage points of GDP compared with the international norm.

But that's just the start. Many OECD nations have national pension systems that preserve people's standard of living after retirement. In Israel, if you count on the National Insurance Institute after retiring, your standard of living will collapse.

To more accurately compare Israel's true tax burden with international norms, we have to factor in our pension provisioning. When we do that, we raise Israel's tax burden by 4 percent more.

Israel, to sum up, levies very heavy taxes from its civilians and private sector.

The root of the dispute over whether or not to cut taxes to encourage growth lies in economic inequality.

Proponents of tax cuts claim that the way to narrow inequality is through education. Opponents see the tax system as a tool to take from the rich and give to the poor.

Proponents of tax cuts snort and would point to a figure that might surprise many. In 2002, just before the great tax cuts, the richest 20 percent in Israel paid 76 percent of the nation's direct tax. In 2006, their share rose to 80 percent.

Meaning, the other 80 percent of the people, who earn less, paid only 20 percent of Israel's tax revenues.

A progressive tax system means the higher the income, the higher the tax. Two measures of the progressiveness of tax systems show that Israel's income tax became 9 percent more progressive in the last four years, and it's going to be 5 percent more in the next four years. The progressiveness of the National Insurance Institute system has doubled in that time.

Unhappily, that isn't the whole story. By another measure, the progressiveness of Israel's tax system has actually deteriorated. Tax collected from the rich has risen, but since the average tax has fallen, the effectiveness of the tax system to reduce inequality in income distribution has been impaired.

In short, the people who earn the most enviously read about the tax cuts but feel other taxes rise, leaving them paying substantially higher taxes than they would elsewhere. Meanwhile, lower earners enviously watch the gap grow between their income and that of the highest earners.

Economists fret at the erosion of Israel's competitiveness, but the people see social gaps widening.

Who doesn't care? The superrich, safe in their tax shelters that protect them and their assets from the tameoin. After all, as the so-called Queen of Mean and tax dodging Leona Helmsley said before leaving multiple millions to her reportedly ill-tempered pooch, named Trouble: "Only the little people pay taxes."