The Bottom Line / Eschew Obfuscation

The business press is currently full of scathing criticism, in endless editorials, of the finance minister going back on his promises to bring parity to taxes on foreign and local stocks by 2005.

The business press is currently full of scathing criticism, in endless editorials, of the finance minister promising to bring parity to taxes on foreign and local stocks by 2005, but then failing to act on his own words.

Apparently officials at the tax office had fallen down on the job (or actually wanted to protect local securities at the Tel Aviv Stock Exchange), and had not prepared the necessary regulations. So it turned out that a significant segment of foreign bonds and funds were not classified as "securities," and therefore could not enjoy the reduced tax of 15 percent but would be liable at the 25 percent level - a distortion that would make them less attractive than our own local instruments. But is it then correct or just to criticize the tax office and Netanyahu with full force, in light of the other tax distortions? Why do they go uncriticized?

Let's take, for example, the tax on dividends, which currently stands at 25 percent, while tax on capital gains is only 15 percent. Everyone knows that dividends and capital gains from selling shares are two sides of the same coin: profits earned on holding shares. So why aren't people attacking this distortion?

When someone sells a tradable share, he pays tax of 15 percent. But if the share is nonnegotiable, he pays 25 percent. Why? For companies, the opposite is true. A corporation pays 36 percent on tradable shares, but 25 percent on nonnegotiable securities. So the encouragement works in the opposite direction. Why? To keep things confusing and to drive us crazy? Or maybe so that business owners can conduct tax planning, maneuvering between personal investments and investing on behalf of the company they own?

When workers of a company are given options in the company's shares as an incentive to work harder - a common practice in high-tech - they pay tax on 25 percent when exercising the options. But when they sell shares they pay just 15 percent. Why are options discriminated against in this way?

The Ben-Bassat committee on tax reforms made order out of the mess. It set a uniform tax rate on all capital gains. This is basic economics: uniform rates to prevent any distortions in allocation of resources. But the Rabinowitz committee set rates at a variety of levels, so that instead of reform, we got a confused babble that is difficult to wade through. Did they just want to set themselves apart from the Ben-Bassat panel? Did they want the tax regime to be so complex that it would drum up plenty of work for consultants and advisers, and day seminars, and books that the panel members could write?

So really the fight should not be just on equalizing taxes on foreign securities, it should be on setting parity on everything, and canceling the greatest mistake of them all: 10 percent nominal tax on nominal assets, compared to 15 percent tax on real assets.

In the age of zero inflation that we live in, we must steer clear of real taxation. Instead there should simply be a uniform nominal 15 percent tax rate (or maybe 12 percent) on every type of capital gains, whether nominal or CPI-linked. This would be the correct reform to encourage the economy and growth through the capital markets.