Behind the Headline Waiting Tax Reform’s Affects

The big question Israelis are asking each other today is “How will Ben Shahar affect you?” They are referring to the far-reaching tax reforms recommended by a committee of experts headed by Haim Ben Shahar which were approved by the Cabinet and overwhelmingly endorsed by the Knesset last week on the first reading as a legislative measure.

Until a year ago, Haim Ben Shahar was a relatively unknown economics professor at Tel Aviv University. Then he was picked by Finance Minister Yehoshua Rabinowitz to head a tax reform committee whose labors, it now appears, will affect the lives of every Israeli. Several months ago, Ben Shahar submitted his committee’s recommendations. At about the same time, quite coincidentally, he was named president of Tel Aviv University, one of Israel’s leading institutions of higher learning.

When Rabinowitz assigned Ben Shahar the task of formulating tax reforms to replace the present complex system riddled with loopholes and inequities, the Finance Minister was criticized on grounds that the committee of experts was little more than window-dressing to show that the government was willing to “listen” to tax complaints. But Rabinowitz indicated that he took its work seriously and fully intended to make use of its recommendations. This, in fact, he has done.

Ben Shahar and his colleagues sat for months, working intensively at their assignment. They finally came up with a detailed plan which was welcomed by virtually everybody — economists, the Histadrut, the manufacturers, and most important — by the government, which lost no time translating the recommended plan into the appropriate legislation.

A PLAN IS SIMPLE

It was a relatively simple plan, abolishing many tax exemptions which enabled much tax evasion. It made practically all income taxable, including, for example, car expenses and telephone bills covered by an employer. It also proposed a considerable reduction of income tax rates — from an absurd high of 87.5 percent, to a more reasonable maximum of 60 percent.

The general consensus in favor of the suggested tax reforms enabled the government to go ahead with the legislation procedure. Last week Rabinowitz introduced the Income Tax Reform Bill to the Knesset for first reading, winning initial support from both right and left. The target date for the introduction of the reform is July 1, — the big question after “How will it affect you?” is: “Will he make it on time?” The Knesset will have to work extremely fast and demonstrate a large degree of inter-party cooperation if the legislation is to be completed in two weeks.

The answers to both these questions are largely unknown. Nobody really knows how the tax reform will affect him. “I am afraid some of my employees will have a smaller take hom pay once the reform is introduced and they will probably come to me to compensate them for the loss,” one employer said. “But I cannot afford it, My profit margin is too narrow anyway.” Others express fears of a different nature. Many who did not have “under the table” compensations such as car expenses, may now have a much larger salary due to the reduced income tax rates. They may cause a return to the dangerous inflationary trends with too much money flowing into the markets. Rabinowitz has already warned that he will make sure that some of that money will go straight back to the treasury by means of additional indirect taxes with the introduction of the value added tax.

TEST IS GOVERNMENT’S DETERMINATION

Most economists agree that the test of the reform will be the government’s and Knesset’s determination to stick to the original Ben Shahar plan, and not to succumb to pressure. The closer one gets to the implementation of the reform, the more pressure one feels. A special problem is car expenses and telephone bills which until now were at least partly tax exempt.

Today the newspaper headlines informed the public that its much valued army officers were among the first to suffer from the reform. A general is entitled to a service car. According to the reform the car may be calculated as additional taxable income of several hundred pounds monthly, and the general’s take-home pay may thus be smaller than that of a major, who does not get a car, or who shares one with another officer.

Zim Navigation Co. employees demand that the company continue the tradition of a free trip to Europe every two years — and they want the trip tax-free. Similar demands are being made by the airline workers, not to speak of the pilots who want to continue receiving part of their pay in Pounds Sterling which is calculated for income tax purposes on the basis of Israeli Pounds worth 14 times less.

The consensus is that the economy is ready for the big operation, but some fear that it may hurt too much, and they prefer that their next door neighbor try it first.