Ramon's Tax Offensive

Justice Minister Haim Ramon's proposal requesting that excessive salaries not be recognized for tax purposes infringes on property rights, but it does so in a proportionate fashion, and for an appropriate purpose: achieving social stability.

Shlomo Nehama did not believe that the dogs also knew how to bite. He thought they would bark, but that nothing serious would happen. He believed that the articles, op-eds and salary tables in the newspapers would disappear from the public agenda, since in Israel one issue succeeds another at a dizzying pace, and who remembers yesterday's issues?

But it has now become clear that Nehama stretched the rope too far. The public, which has already become used to salaries in the millions, was unwilling to swallow salaries in the tens of millions: NIS 33 million for Bank Hapoalim CEO Zvi Ziv, NIS 23 million for chairman of the board Nehama, and NIS 15 million for Dan Dankner, the former deputy CEO.

These tens of millions aroused an unprecedented public outrage and outcry, and led the new justice minister, Haim Ramon, to submit a bill (which Haaretz had recommended previously) stating that excessive salaries - more than a ceiling of about NIS 4-6 million - will not be recognized for tax purposes.

If the law passes, the public will cease to be an unwilling participant in the excessive salary party. It will stop financing 50 percent of inappropriate wage expenditures. The result will be a heavier burden on the commercial companies, and therefore a decline in multimillion-shekel salaries.

Granted, this proposal infringes on property rights, but it does so in a proportionate fashion, and for an appropriate purpose: achieving social stability. Therefore, it will presumably be upheld by the High Court of Justice. After all, the tax authorities also refuse to recognize other extravagances - neither excessive outlays on hotel rooms nor the purchase of a Rolls-Royce for the CEO.

The problem is concentrated in publicly traded companies, and especially the banking system - a cartel-like system where competition is minimal, where Bank Hapoalim and Bank Leumi have unlimited control over the household market and charge enormous fees and high interest rates that far exceed equilibrium prices. Therefore the state has a moral and economic right to intervene. This is a clear market failure.

True, it would have been much better had the banks' boards of directors intervened and prevented the excess. But board members are part of the group of "fat cats," professional yes-sayers of whom not one would dare to open his mouth against these enormous sums. Some adhere to the rule of "you scratch my back, I'll scratch yours": Today I will approve it for you, and tomorrow you will approve it for me.

It would also have been preferable had financial institutions - the mutual funds, provident funds and insurance companies - done their jobs properly and defended their investors, and thereby the public at large. But they did not. They should have voted "no" at the shareholders' assembly, but they too find it unpleasant to disrupt the festivities. After all, they are all good friends.

The problem exists at publicly traded companies, because at these companies, the owners can pay themselves excessive salaries while the money comes mainly from the public. At Bank Hapoalim, the Shari Arison group owns only 29 percent of the stock, while the general public owns 71 percent. Thus, the public is paying the bulk of the salaries awarded to Nehama, Dankner and Ziv, instead of receiving suitable dividends.

It would have been appropriate for both the Bank of Israel and the Israel Securities Authority to intervene in earnest. But the problem is already almost 20 years old (since the affair of Ernst Japhet's salary and pension broke in January 1987), and the public is still being robbed. Therefore in cases of market failure such as this, when all other systems have failed, the legislature should intervene. And once it is intervening, it should expand its scope.

In addition to not recognizing excessive salaries for tax purposes, Ramon should demand that the process be completely transparent. All board members should attend discussions on wages and submit a detailed opinion, including the reasons for their stance. They should explain why such a high payment to Nehama promotes the company's welfare, why Ziv would not do his job faithfully for a quarter of the sum, and whether Dankner's salary reflects the marginal value of his output at another job, one where he is not among the owners. And companies should have to publish the complete minutes - which would be no less painful a whip than that of paying tax.

Such a complete accounting should also be demanded of all financial institutions that attend shareholders' meetings. The managers of the mutual funds - Excellence, Afikim, Harel, Tamir-Fishman, IBI, Quattro, Alumot, Solomon, Millennium, Models and Kivun - should explain why they supported the excessive salaries at Bank Hapoalim. Why did they not defend their customers? After all, Nehama himself said afterward that "the salary and benefits we received deviated from the desirable [norm]."

The growing gaps between rich and poor undermine the foundations of our existence. It is the main problem now facing Israeli society. It is impossible to maintain a healthy society - one with social solidarity that is willing to shoulder burdens - over time when the "fat cats" are celebrating to eye-popping excess at the top, while the poor are earning minimum wage. And if this necessitates a law - let it be passed.