Even before the annual OECD report warned us about Israel's dangerous real-estate bubble, a report last week on socio-economic gaps put Israel in line with the U.S. in terms of the growing gap between its richest and poorest populations, a drastic decline for Israel. This could be seen as a bad thing, especially in light of another recent report that indicated that the growth of Israel's economy has slowed, but a deeper look into the data on widening gaps could prove encouraging.
In Israel, where a relatively low percentage of the population participates in the workforce, every percentage of economic growth widens the economic gaps accordingly. Clearly the first ones to benefit from economic growth are those within the workforce, and the last ones to benefit are those who don't work. There is another, fairly large, group that benefits but doesn't report it – laborers who evade taxes by not reporting their earnings.
Based on this, it appears that an economic slowdown would actually improve socio-economic gaps. Obviously no one would benefit from such an eventuality, but the figures would look much better on a report – to the layman. The same figures would be problematic for the leaders of poor communities who live off presenting the situation as catastrophic. Last year, Israel's economic growth rate was among the highest in the developed world. The financial crisis that hit most developed countries – namely the U.S. and Japan – appeared to have narrowed their economic gaps. Why only appeared? Because in the modern world income gaps don't accurately reflect socioeconomic gaps. The social gaps between Israel's secular and ultra-Orthodox sectors, or between Israel's Jews and Arabs, don't stem from income gaps.
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But rights groups, as well as the media, that have enlisted to aid the poor, insist that these social gaps can be measured in terms of income. The government can't argue with that, especially now when every media outlet is serving Daphni Leef (one of the leaders of this summer's social justice movement that mainly revolved around the growing economic hardships of the middle class). Apropos, last week one of the recommendations of the Trajtenberg Committee (appointed to provide solutions to the issues raised by the social justice protest movement) became the "distribution of tax law" which essentially imposes taxes on the rich in order to lessen the tax burden of the lower classes.
But if you look at the facts, the top two deciles already bear the brunt of direct taxation and the lowest six deciles don't pay any income tax at all! The new law will grant fathers to children under 3 years of age a tax break of NIS 418 per month, and mothers of children under 5 will receive a tax break, if they pay taxes of course. Higher wage earners will pay higher taxes. They'll be fine, that's not the problem, but the distribution of the tax burden will certainly not be any different. This law nullifies the "streamlining law" legislated some two years ago in efforts to reduce taxes on labor and replace them with capital gains taxes. This law actually proved to be effective – unemployment declined and the economy boomed.
We all enjoyed the increase in workforce participation and the decline in unemployment and the consequently improved quality of life. Trajtenberg's path is one of populism that defines socio-economic gaps by income and formulates solutions to problems that aren't real. We don't have a history of better economic times that we can cling to nostalgically; It is likely that in the future we will actually long for what we have today, with people protesting in the streets lamenting their imagined misfortune.
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