The Bottom Line / There's Nothing Up His Sleeve

Finance Minister Silvan Shalom would like us to believe he's Houdini. He unveils a plan to plug a NIS 13 billion deficit and tells us almost no-one will get hurt.

Finance Minister Silvan Shalom would like us to believe he's Houdini. He unveils a plan to plug a NIS 13 billion deficit and tells us almost no-one will get hurt.

As if such conjuring were possible, as if we could implement the policies of Prime Minister Ariel Sharon and the Likud at no cost. As if we could declare that not one settlement will be evacuated, not even one remote solitary settlement - and it won't cost us. As if it were possible to carry on living by the sword, losing our friends in Europe, putting our friendship with the U.S. in jeopardy, drifting on without any policy - and not have to pay the horrific social and economic price of it all.

But then Shalom is no magician. He cannot perform miracles, so we must all pay the price. The lowest deciles will pay through the 1 percent rise in VAT, through the 4 percent cut in state allowances, through rising cigarette and diesel prices. The Arabs and ultra-Orthodox will be clobbered, as a result of the sharp cut in child allowances to families where no-one has served in the army (another NIS 1 billion saved). Those on income support will receive less, and those among them unable to find a job will find it more difficult to qualify for unemployment benefit.

For the middle income earners, Shalom repeatedly declares "the middle classes will not be hurt". Raising VAT though will hit the middle classes as most of their income goes on consumer spending. Freezing pay will hurt them too, as a freeze in real terms is a 4 percent cut in salary (about NIS 1 billion in government budget terms). The growth in the budget deficit hurts them too as it leads to a higher interest rate and threatens stability.

Now the higher income earners will lose out heavily in greater National Insurance contributions and health taxes. They are also going to suffer from the higher interest and by the expected fall off in consumer spending. In addition, their expenses will jump following the 1 percent reduction in employer incentive payments (NIS 1.4 billion).

The sharp increase in NII contributions and health taxes Shalom called "cancelation of the ceiling". Well that sounds good, but it is really a rise in the Israeli marginal tax rate to an amazing 60 percent (actually 60.5 percent as an extra 0.5 percent was introduced in February on those earning over NIS 30,000 a month).

Popular though it is to screw the rich, they happen to be the most vital group of managers and entrepreneurs, of the high-tech and research worlds. If they don't earn here what they could elsewhere, some of them may leave, and the economy will suffer. Of course tax evasion will rise, because a 60 percent rate of income tax (together with 18 percent VAT) doesn't leave much in the pocket, and everyone knows that in the U.S. marginal tax rates are 36 percent, 40 percent in exceptional circumstances.

And so the finance minister takes us back 20 years to the early 1980s when the marginal tax rate stood at 60 percent. But then we were lucky enough to have a liberal minister. In a courageous step, Moshe Nissim slashed the rate to 48 percent, declaring "A man should keep most of the fruits of his labor". We miss'im, that Nissim.