Capitalism With a Human Face - Pt. I

I'm generally in favor of the attempt by Finance Minister Benyamin Netanyahu and the government to reform the economy. It should be obvious to all by now that it's way overdue. But, it must be capitalism with a human face. That is, it must be done with a concern not to further impoverish the weaker sectors in the name of progress. It must open up opportunity at the same time that it reduces the go

Ariel Natan Pasko,

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The first thing I want to state is that no one should ever accuse me of being anything but a free-marketeer. At a major economic conference in 1988 - before the elections - I spoke with the head of the Manufacturers Association and the head of a prominent free-market think-tank in Israel about starting a new political party "The Capitalist Party". This new party I said, should not take a position on the war-peace issue, the religious-secular issue, but single-mindedly focus on reforming the structure of the economy, tax reduction and capital market reform, encourage entrepreneurship, the whole nine yards. Both concurred that it was a worthy endeavor. But both warned me, "You have to change the name. Capitalism has a bad name in Israel." That about says it all and with that said, read on.

Therefore, I'm generally in favor of the attempt by Finance Minister Benyamin Netanyahu and the government to reform the economy. It should be obvious to all by now that it's way overdue. But, it must be capitalism with a human face. That is, it must be done with a concern not to further impoverish the weaker sectors in the name of progress. It must open up opportunity at the same time that it reduces the government budget.

There are too many elements of a complete economic reform program to discuss in a forum such as an op-ed article, so I will limit myself to five: Restructuring Kitzvat Yeladim - Child Allowances; Havtachat Hachnasa - Low Income Supplements; Bituach Leumi - National Insurance Institute - payment tax; reducing Income Taxes; and encouraging entrepreneurship and employment opportunities.

At the same time that - according to the new plan being put forward by FM Netanyahu - large-families are losing much of their Child Allowance monies from the National Insurance Institute, there is a need for new economic opportunities to be opening up, so that we don't exacerbate an already dire situation. I've heard some say, "we'll force them to work". Where are the jobs? Many people have talked about the importance of reducing the large-family benefits. They say, "It's not fair. Every child should receive the same amount." Well, in case you didn't notice, a family of eight - six children - losing about 1,800 shekels from Child Allowance funds, reduced to living on 6,000-8,000 shekels/month, does not equal a family of four - two children - living on 6,000-8,000 shekels/month. Equalizing payments to 144 shekels/month per child will not treat everyone equally. It disproportionately hurts those already poor.

Israel needs to rethink this 'Israeli' idea of treating everyone 'equal'. Treating unequal people equally, giving them both the same thing when they need different things, is mistreatment. The goal should be, 'Equality of Opportunity' not 'Equality of Outcome'.

To help cut the budget, why not just do away with Child Allowance on the first two children altogether. As anyone who has raised children knows, in the first few years, they really don't cost that much to take care of. Even young couples at the lower socioeconomic end of the spectrum wouldn't be hurt too much. Child Allowances could kick-in with the third child and there should be a maximum income level of 10,000-12,000 shekels/month; any family making more than that simply doesn't receive any payments. Child Allowances could also be gauged toward age. That is, they first start after a child reaches, say, four or six. The payment level could even rise at a later age, when children do cost more, i.e., teenagers. Does it make sense that someone like FM Netanyahu - making about 35,000 shekels/month, should receive Child Allowance -about 300 shekels/month - for his two kids? If Netanyahu lost his Child Allowance money, would it hurt him as much as the loss to an average, larger family?

Many poorer families are living on the extra money from Child Allowance. Why should the national purse be supplementing wealthier people? If you're making 30,000 shekels/month, you're probably using the money for better vacations, fancier housing, new transportation, other consumer durables, or putting the money into a college fund. While some people use the money for food, others plan the success of their future generations, or indulge in conspicuous consumption. Is that fair? No, that will help perpetuate poverty and class differences.

Right now, the maximum income level to pay National Insurance Tax on is 35,000 shekels/month. Why? Why not raise it to 100,000 shekels/month or more? By the way, with the recent reports of the excessive salaries of many heads of government companies - i.e., the Electric Corporation - and other public employees, it would bring a bit of 'justice' to the situation. I didn't realize that people making 50-100,000 shekels/month would 'suffer' paying a few thousand shekels more. It certainly won't take food out of their mouths or adversely affect their children.

Today Israel is in second place globally - behind only the United States - in income disparity. That is the gap between the poorest and richest sectors of society. But there's a major difference, Israel has a small stagnant economy with almost 11% unemployment, and the US has a very large economy, slow but growing, with no more than 6% unemployed. Entrepreneurial opportunities at all levels abound in America. When thinking of trying to open a business, no one worries about the Internal Revenue Service the same way people in Israel are concerned about Mas HaChnasa - the Income Tax Authority. An entrepreneurial spirit pervades America, so why is there such problems in Israel?

It's the residue of what I call the 'Socialist Mentality'. On the one hand, the expectation that 'Big Brother government' will take care of you; an all-pervading attitude that everyone be treated equally, that leads to great social and market distortions. And on the other hand, a kind of distrust of business and businessmen, especially on the part of certain areas of government, like the Tax Authority. "Capitalism has a bad name in Israel," they told me, and they were the business people and free-market pushers.

One detail of the reform plan made public is to reduce income tax. Great. But if you look closely, the lower half of the pyramid isn't receiving much 'tax relief'. What can you do with an extra 150-300 shekels/month? Buy stocks? Start a business? While the richer half, those making 15-25,000 shekels/month and more, get substantially larger tax breaks. One could argue that those who are wealthier know what to do with their money. Well, if you mean how to spend it on themselves, fine. I heard that the top tax bracket is to be reduced from 52% to 35%, and I'm very happy. But, I would be happier if at least some if not most of that extra money in the pockets of the already wealthy would need - by law - to be invested in productive enterprises, in investments that would expand employment, or in charitable contributions that would lessen the burdens of government. That could compensate for the government rolling back the social welfare net. How are Netanyahu and his cronies going to be sure that it won't just be spent overseas on expensive vacations? He can't, and doesn't care about that and that's what's wrong with how they're 'reforming' the economy. The reforms need to be in the spirit of capitalism with a human face.

Disclaimer: All the figures used in the article are only rough estimates. Due to the lack of transparency, the author is not privy to true analytical data, nor does he know if the government is either.

[Part 1 of 2]
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Ariel Natan Pasko, an independent analyst and consultant, has a Master's Degree in International Relations & Policy Analysis. His articles appear regularly on numerous news/views and think-tank websites, in newspapers, and can be read at www.geocities.com/ariel_natan_pasko.
(c)2003/5763 Pasko
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