Isolating the Biggest Problems in Israel

We all are beginning to understand what is right about Israel.

It is at the pinnacle of human accomplishment in technology, innovation, culture and wealth.

Amid a global slump, it is still growing at an annual rate near 5%. In startups, IPOs, and venture capital, it leads the world by any per-capita standard and in some ways by absolute metrics. As a “startup-nation,” a world-leading 70% of its growth comes from venture companies.

In Benjamin (“Bibi”) Netanyahu, Israel has a prime minister of Churchillian rhetorical powers, strategic expertise, and economic acumen. He is about to lead the Right to a new and expanded electoral victory, with the Labor socialists. According to the latest polls, pretty much out of the Knesset (below the 3.2% cutoff) and the entire Left down to under 15% of the vote.

For this success, you can count on many indignant screeds from the US mainstream media about his various Churchillian foibles.

But in Israel these two weeks for a Discovery Institute tour with Michael Medved, I am eager to celebrate Israel’s amazing feats of innovation and creativity.

Yet Israeli experts will have none of it. They are in a snit about “unaffordable housing,” “inequitable income distribution,” and defense policies that have kept the country safe at the expense of mistreatment of terrorists and their families.

Critics seem to assume that people resolved to kill you can be suppressed by human rights litigation, refugee aid, and UN peace delegations that uphold fables of Israeli theft of land and water from Palestinians.

They have not figured out that there was no water to speak of and scarce arable soil and few Arabs on the land until the Jews came and reclaimed it in the late 19th century. How could there have been “displacement” when five times more Arabs live in Israel, with drastically higher incomes and longevity (73 years) than ever in a thousand years. And ten times more Arabs live in the rest of Palestine.

That’s not “displacement” or “occupation.” That’s the irresistible attraction of the world’s most innovative economy and agriculture created by Jews. That’s the power of Jewish “settlements.”

Meanwhile, Jordan, with the same topology and resources, and with four times more land, supports a population density one-tenth as high at incomes 40% lower.

With all of that said, however, there are a few things drastically wrong…

Astronomical Tax Rates Cause Major Problems

For one, they apologize obsessively to anti-Semites. They talk about sacrificing the land and settlements they have created to people who believe it shames their “dignity” to work for productive Jews. To outsiders at least, Israelis spend all their time vaunting their charities rather than celebrating their unique contributions to the world economy.

Worst of all, they have some of the highest income tax rates in the world. At a total of close to 60% on top incomes, they drive high earners out of the country and increase the tax load on all the remnant people who stay.

Combined with payroll taxes that total nearly 10%, the rate for fulltime working Israelis is 47% withheld at the source. The top rate biting at $140,000 is 57% (including payroll taxes).

Israelis, like US liberals, claim that payroll and medical taxes don’t count. Israelis add plaintively that they have unique defense burdens. But a tax rate anywhere near 50% gives the taxpayer a far greater incentive to avoid taxation than to earn more income. No one with brains will pay it more than once or twice. This causes a diaspora of taxpayers from Israel.

Any tax rate that gives people more incentive to duck it than to earn money drastically reduces revenues to the government for defense or anything else. Since nothing works with a 50% tax rate, the result is a plague of politics and subsidies infecting every activity in the country.

Don’t forget that on top of all the income and payroll taxes, Israelis, like Europeans, incur a 17% value-added tax (VAT) on almost all their expenditures (beyond unprepared foodstuffs and low-income housing).

After all the taxes are withheld or gouged, middle-class Israelis have little left for housing. So most real estate is subsidized and politicized rather than a source of profits for builders and income for the government.

Time-Prices in Israel

So how is Israel the world’s leading economy?

Similar to the US during the 1990s, all the revenue flows through the capital gains tax. This rate is 25% and in Israel adjusted annually for Consumer Price Index (CPI) inflation (which as all of you students of time-prices know is bogus). In a capitalist economy with growth as learning, inflation is non-existent except in the cost of government and its exactions.

My time theory of money shows that Israel’s innovative contributions are far greater than is gauged by the usual GDP data with their CPI or “hedonic” adjustments for technology. Heavily centered in Israel, advances in information technology and learning have been driving the world economy through decades of benign deflation. Real prices have been dropping every year.

Israeli companies — together with US leaders such as Intel, Johnson & Johnson, IBM (Watson), Google, and Microsoft powered with Israel Inside — have been the spearheads of world growth. This growth is best measured by a massive reduction in the number of hours of work needed to purchase the key commodities sustaining life and longevity.

Gale Pooley and Marian Tupy call these time-prices and demonstrate that by that measure world economic abundance has increased 518% since 1980, with incomes and populations rising steadily and prices plummeting by an average of 3.4% a year.

Most of this activity has been fueled by venture capital (virtually unregulated) and taxed as capital gains adjusted by bogus inflation numbers. In Israel venture investments thus face steadily declining real capital gains taxes. Lower taxes yield higher revenues and support everything in the country. It’s a wonderful life.

But the rest of Israelis (and Americans as well) are taxed in ways that impose hundreds of billions of dollars in unnecessary and self-defeating tax bureaucracies and political bribes. Some of them have to struggle to find homes.

They feel aggrieved and they should.

That’s what’s wrong with Israel.