January 03, 2004

Death by Taxes
(via ibergus)

Israel's economy suffers from an excessive level of government spending and a heavy tax burden:

Last year, government spending in Israel constituted 55 percent of the country's economic activity. This puts Israel three percentage points ahead of Sweden for the dubious distinction of having the largest public sector in the industrial world. And tempting as it is to blame excessive spending on the threats Israel faces, defense expenditures account for only one-fifth of its annual budget of $56 billion. The real problem lies with social benefits, transfer payments, and the bloated government payroll, which together comprise more than half the budget. In other words, even if it were possible to lower Israel's defense spending to the level of a typical European country (3 percent of GDP, instead of 10 percent), the Jewish state would still rank with Sweden, Denmark, and France as a world leader in budgetary profligacy.


The devastation caused by Israel's tax burden plays itself out in a long string of disincentives that quash economic activity at every turn. High taxes on labor undermine the individual's incentive to work harder, while discouraging employers - who typically must give the government one dollar for every dollar they add to the net income of an employee - from promoting workers or hiring new ones. These same taxes also stifle capital development, since they leave Israelis with little disposable income to save or invest. And, by raising the expenses of companies both for labor and for the procurement of goods and services, high taxes are a formidable obstacle to Israel's competitiveness internationally.

All this is bad enough, but it may not be the worst of it. High taxes dramatically increase the incentive to cheat, as anyone who has ridden in Israeli taxis quickly discovers. The reason the meter is typically "broken" is that cab drivers prefer not to run it, as it produces an official record that will be used for calculating income tax and VAT payments. In the same way, Israeli teachers often supplement their income by teaching private lessons after school hours, for which parents pay with personal checks on which the payee line is left blank. Virtually the entire industry of home additions and repairs likewise operates on a cash basis, which entails the creation of "unofficial" receipts given to the customer, but not to tax authorities. The prevalence of illegal economic activity, driven in large part by exorbitant tax rates, turns hundreds of thousands of otherwise law-abiding citizens - most of whom unhesitatingly leave their families to serve their country in army reserve duty - into tax cheats, accustomed to duplicity in their economic transactions.