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Import duties and the Israeli Laffer curve

If you’re like most Americans, you tell your relatives who send you packages not to declare that anything is new or has a value over $5.  You do this because one time a relative sent you something and the post office held it hostage until you paid some sort of ridiculously large tax/fine/payment that is calculated using what I can only assume is some sort of mixture between random numbers and witchcraft.  Well, a tiny bit of that is about to change.

As of January 30th, Yuval Steinitz signed a reformation of two import taxes.

– No import taxes on anything ordered by the internet up to ₪ 1,200, although you’ll still have to pay 16% for VAT.

– No taxes (even VAT) on personal packages valued at $75 (up from $50).

The first reform is a great piece of legislation that decreases the cost of alternatives and fosters more competition.  The ₪ 1,200 limit means that the increased competition will only affect lower end items, not luxuries.  I would be interested to know why the government chose such a low number (why not, let’s say ₪ 2,000), but I agree with the idea.

The second price of legislation is also a step in the right direction, but is telling of the government’s ignorance of the issue at hand.  When someone does not declare the full value on the package, he is really only giving up the insurance on the package in the case of loss or destruction.  The value of something is what you pay to get it and I am not willing to pay customs duties in order to receive insurance on the package sent.  This legislation is not going to make any difference to me on any packages valued over $75 because the cost of customs is still too much for me to declare the items.

If the government want to both maximize tax revenue and help its citizens, it should analyze how much people would be willing to pay for insurance on packages and lower the import duty to that level.

Ronald Reagan won the 1980 election by using the Laffer curve to prove that he could raise government revenue by reducing certain taxes.  For those who are not economics nerds, the Laffer curve is a curve that shows the relationship between tax revenue and the various possible rates of taxation.  History shows us that his application was entirely incorrect, but the theory stills holds.  It seems that this is one of those very rare cases when tax cuts along the Laffer curve could be very useful.

Do you instruct your relatives declare the value of items that are sent to Israel?  If not, how low would the tax have to drop in order for you to tell them to declare the true value?

Trajtenberg: More tax breaks for the rich


this article is a slightly more in-depth version of the op-ed I wrote that was published in the Jerusalem Post.

This past summer, hundreds of thousands of Israelis gathered to protest for social justice; an end to the widening economic gap plaguing Israel’s poor. The demands were simple: cut down on the government corruption and change the monetary policy that work in favor of big business and begin taxing the rich and redistributing wealth. Unfortunately, after months of protesting, the Israeli government on the advice of the Trajtenberg Committee, only marginally changed the tax system, not only failing to address the economic gap with income redistribution or monetary policy, but worsening it by giving disproportionately large tax cuts to the wealthy.

How exactly in the midst of public outcry for reform did the Netanyahu government manage to fit in more tax cuts for the wealthy? The secret was the expansion of a tax loophole using Bituach Leumi, National Insurance. For absolutely no reason, Bituach Leumi, unlike all other programs that are either controlled by the government or sponsored entirely by it, collects its revenue through a separate income tax.

This tax, along with the bureaucracy of Bituach Leumi, has a long history of working against the less fortunate. In particular, Bituach Leumi ignores tax credits and disenfranchises Israelis working more than one job from doing a full tax alignment by demanding that workers do an additional Bituach Leumi alignment and then systematically drowning the workers in confusion, bureaucratic incompetence and paperwork until processing such an alignment becomes economically prohibitive.

Worst of all, Bituach Leumi’s income tax makes Israel’s tax system regressive for the super wealthy, dropping the marginal tax rate for those who earn above a declared ceiling. Previously, the ceiling for Bituach Leumi income tax was NIS 73,422 per month – up to that amount the tax rate was 12 percent, and any income over that amount was not taxed. The Trajtenberg Committee advised dropping that ceiling to NIS 41,850 – in other words, giving a substantial tax cut to both those earning between NIS 41,850 and NIS 73,422 per month and those earning above NIS 73,422 per month. The government approved the measure, which will go into effect next month.

A comparison of the overall income tax rates from 2011 and 2012 shows that Trajtenberg Committee’s reforms ended up not only giving the super wealthy a greater tax break than their less fortunate counterparts in absolute terms, but also in percentage of total income earned.

Consider the charts below of a simple male worker in 2011 and 2012 with 2.25 points.

Notice in the second chart that once a worker makes a bit more than ₪ 40,000, his tax break rises significantly.  That’s the Bituach Leumi ceiling kicking in.

But what about the points?  Certainly all the new points for young fathers should fix this up, right?  Alright, let’s completely disregard women (after all, the Trajtenberg Committee certainly does…) and deal with the case of a father getting 4 extra points for his children.  The graphs would look a bit better:

In this case the less fortunate father would only get a slightly bigger tax cut than his wealthy counterpart.

And this is completely justified; with the price of daycare through the roof and working mothers unable to use their tax credits, helping fathers is a fantastic idea proposed by the Trajtenberg Committee, although an obviously better solution would be to let married couple share points, like they do in the US.

Regardless, giving a few tax credits to the poor does not justify the tremendous tax cuts given to the rich.

The justification for the Trajtenberg committee’s recommendation to cut taxes for the rich is that high income earners were setting up shadow companies to get around paying Bituach Leumi taxes. It was reasoned that by lowering the Bituach Leumi income tax, high earners would be more likely to pay their taxes.

But exploiting one loophole to avoid another is unacceptable, especially when the government can easily close both. The government seems to fear a mass exodus of the rich, which is absurd. No intelligent CEO will just up and leave his job, family and country because he has to pay his taxes, and if he or she does, Israel has more than enough local talent to compensate. This is exactly the kind of corrupt kowtowing to the super wealthy that sparked last summer’s protests.

Israelis need real economic reform that rolls back some of the supply side policies and takes a fresh look at what is supposed to be a progressive tax system. Bituach Leumi should be incorporated into regular income taxes, laws that enable tax loopholes need to be closed and points should be awarded not only based on the individual worker, but also on his or her respective family unit. One we take these preliminary steps, perhaps the Israeli government will finally be able to legislate kind of reform that was promised this past summer.

ER economics 101

This past week, I was sent my doctor to the ER for treatment of a boil.  I’m doing well, thank you, but it was a huge pain.  Certainly more of a pain than wild animals, but not as much of a pain as hail; overall, I’d give it a 6 out of ten.

When I got to the hospital, the ER was packed; there was not a single seat available in the waiting area.  The only time people seemed to get up was in order to yell at the nurses for their not having seen a doctor yet.  Doctors had to run from room to room in order not to get mobbed by impatient patients.  At one point during the evening a doctor broke down and, after a patient yelled at her that he had been waiting five hours, screamed back at the patient complaining about her terrible working conditions and paltry salary.  More words were exchanged, but I don’t know enough swear words in Russian to translate properly.

By the end of the night, I had waited eight hours to see a doctor.  In retrospect, my waiting was partly my fault.  Medical care is a resource like any other and I should have been looking at this situation using economics, the study of who gets what and why.

Hospitals are overcrowded; doctors are resource in a terrible shortage.  One of the jobs of the nurses is to sift through the patients and prioritize so as to use the resource in the best possible way.  This means that seeing a doctor has more to do with one’s relative priority to others in the ER and less to do with one’s time of arrival.  While many try using intimidation to make themselves look like more of a priority, the better strategy is to wait until a time when there is not much competition.

When a doctor sends gives you a referral to the ER, ask him or her if you need to go ASAP or if it can wait until around 3AM.  If it can, then go home and relax before going to the ER.  Doing this can reduce your waiting time from as much as eight hours to as little as thirty minutes.

Two more things to note: (1) Yelling at the doctors will not help.  They are not the ones under-staffing the hospitals.  If you want to yell at someone, look up the MK’s phone numbers and call them. (2) If possible, try to always to go the hospital with food, a book, an iPod, and, if possible, even a laptop and a couple of movies.  You’re going to wait anyways, so you may as well plan your own entertainment in order to make the time go by quicker.

In an ideal world, our government would get its act together and help provide better medical care for its citizens.  Until that happens, the best thing you can do is to be understanding of those trying to provide you with medical care and to do your part as well.

fighting financial dictatorship

Years ago, when governments needed money to help their respective economies, their options were limited to taxing their own people and invading other countries.  Such measures were difficult; after all, people generally dislike taxation (with or without representation) and other countries have a nasty habit of defending themselves.  A few hundred years ago, this all changed when western government discovered that they could just print money whenever they wanted.  But when new money was printed, government bureaucrats tended to waste it on superfluous projects.  To counter this problem, monetary policy was born.  Monetary policy dictated that money would not simply be created and spent; it would be created and loaned out to job creating businesses at varying interest rates.  This would ensure that the money would be given only to businesses so that they could help the economy stabilize and grow.


Ancient Rome was famous for its occasional use of dictators.  Dictators would, for a limited amount of time, assume absolute power and make decisions when the public proved unable to do so.  The head of the Bank of Israel is our dictator for money.  He can decide to supersede the normal way of collecting money and lay a flat tax on all of our money by changing the interest rate and lending money.  The mark of a great Roman dictator was not his conquests, but how infrequently and precisely he used his power and ultimately, when he returned it to the people.    The head of the Bank of Israel should be the same.  In fact it is the frequency with which it uses its power and its complete disregard for the voice of the people that was caused our current financial upheaval.

The Bank of Israel has already admitted that its policy of keeping interest rates low caused the housing crisis.  The bank of Israel kept interest rates insanely low (2%) for all of 2009 and 2010, forcing investors into the only market with a decent payoff, real estate.  And since investors generally have more money than private owners, housing turned from a basic necessity to a piece of a portfolio.


Let’s look at the alternative.  Imagine what were to happen if representatives of the Bank of Israel were to meet the citizens of Israel and explain that they will have to pay more taxes in order to subsidize exporting companies.  Public outcry would ensue, but once the cries die down, citizens would rationally ask for terms and conditions.  Okay, maybe that’s a stretch, but at least the democratically elected representatives of the people could decide on a list of reasonable terms and conditions (perhaps they would even form a ministry dedicated to finance!).  Israelis could demand that the companies submit a plan for their use of the subsidy and explain how they will become self sufficient within the next few years.  Israelis could demand that CEOs of such companies receive limited pay or that the companies do not lay off certain workers.  Then, either the company would agree to the conditions, bargain them, or choose to fold.

Instead, the Bank of Israel decided to play God with the economy and tax the people to bolster the rich.  And with the oversight of the people disregarded, the companies that benefited from the monetary policy reaped the benefits while becoming addicted to government subsidy through the low interest rates.  Now these companies are weaker than before threatening “too big to fail” if the government cuts off their crack.


Since the social protests began this past summer, it has been difficult to pinpoint exactly what went wrong.  Bibi blames bureaucracy, the Bank of Israel blames the global economy and the Ministry of Finance isn’t sure who to blame because Israel still has low unemployment and solid growth – and this is the problem.  It is exactly this blaming, inaction, and relinquishing of power while denying reality that caused this financial crisis.  It was the government’s secession of oversight to the Bank of Israel and the Bank of Israel’s secession of Israel’s economy to the global economy that caused the current crisis.  As long as our representatives in the Knesset refuse to take back power from the Bank of Israel, they cannot do anything to fix the economic crisis.  And if they refuse to do anything, I suggest we get rid of them and elect representatives who will.

tournament theory and the medical solution

Have you ever wondered why your incompetent boss makes so much more than you?  Well, economists have an answer, tournament theory Developed about 30 years ago, tournament theory suggests that most offices are a tournament where differing workers compete for a prize, which is usually given in the form of a promotion.  Tournament theory suggests that your boss’ pay is not so large because he or she deserves it, but because it is meant to motivate you.

Does the pay difference between you and your boss have to be so large?  At first glance, the answer would seem to be yes.  Let’s take an example of a payment compensation scheme at the fictional but squeaky Rubber Duck Company.   The manager tells the workers that whoever makes the most rubber ducks gets $100 and everyone else at the company will make only $40.  The workers know they are guaranteed $40 and would only put in up to $60 worth of additional effort in order to get the prize; anything else would be a loss.  Realizing this, the manager changes the pay scheme, telling the workers that the winner gets $100 and the loser gets $10, thus increasing the amount of work that each worker will put in to approximately $90.

But first glances can be deceiving.  As the working season begins, workers begin sabotaging one another.  Also, some workers who were previously able to try and put in the $60 of extra effort have cut back entirely because they know they will never be able to produce $90 of extra work like some of their more able coworkers. Finally, one worker notices that a rival company, Quackers, which is currently hiring, is planning on giving their workers the same deal as the Rubber Duck Company except the top prize if $65 and the bottom is $40. Realizing that working at Quackers guarantees $40 and would only require up to $25 of extra work, many workers leave the Rubber Duck Company and their over-competitive manager.

So what’s better, a large spread or a small spread?  Like most things in economics, there is an equilibrium point.  Far from being perfect, this point may end up discouraging a whole lot of workers, especially when there is luck and protectsia involved.  One solution to this is to offer a few different prizes.  Suppose the Rubber Duck Company offered $90 to the best worker, $70 to several runner ups and $40 for the rest.  With not so much of their pay at risk, workers would be less antagonistic, perhaps even helping one another in alliances.  These workers may also take a shot to win the prize, whereas in the past, the out-of-reach goal was discouraging.

In a recent round of negotiation between the Israeli Medical Association, tournament theory, whether using its name or not, was among the many, many issues discussed.  Doctors have been leaving the public sector for many reasons, one of which is a lack of advancement.  In a standard department of a hospital, there are two levels, regular doctor and department head, a position held until retirement.  As a compromise, a new position between regular doctor and department head, or second tier prize, has been offered.  This new position will be called ” service manager.”

This compromise gives me hope.  Creating an in-between level is the obvious solution to discrepancies that are way too high.  Perhaps in time, there will be less department heads, and more service managers who will become the new de-facto department heads with pay discrepancies not as insane as the ones currently in place.  I am curious to see if this works and I am even more curious to see if it can be applied to office life as well.  Perhaps creating loopholes around the levels of bureaucracy ordained by the government and accepted business practice, we can deal with the income disparity in Israel without the need for a socialist revolution.  Or maybe I am too optimistic.  Perhaps we need the pendulum to swing the other way in order to get better social benefits and address the growing income disparity in Israel.

What do you think?

Buy Later, Not Now



Then the article gets ridiculous.




















Next: a post that is not about the housing crisis!