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Tax Cuts not Tax Hikes; How Israel Beat the Recession

Posted: 21 Dec 2009 08:07 PM PST

While most of the news narrative about Israel focuses on its
daily struggles against terrorism, a more subtler international
controversy is brewing as Prime Minister Netanyahu and Finance Minister
Yuval Steinitz continue to insist on enacting corporate tax reform,
cutting corporate and high income bracket taxes, despite opposition from
domestic sources and the International Monetary Fund.

The media while focusing a great deal of attention on
capitalism's "failings" abroad, particularly in Iceland, has ignored
success stories such as Israel's as inconvenient to their socialist
agenda. Yet in his second term, much as in his first term and his tenure
as finance minister under Sharon, Netanyahu has gone against the
conventional wisdom by emphasizing privatization and tax cuts. Teamed
together with Dr. Yuval Steinitz, Israel's Finance Minister, who in the
aftermath of Oslo went from far left wing protester to patriotic
conservative, the results have been striking.

Israel's GDP has
continued to grow throughout 2008 and 2009, even as under Obama the GDP
has gone deep into negative numbers territory. Despite rising boycotts in
Europe, an ongoing war at home and the entire Muslim world virtually
closed to Israeli businesses, Israel's economic picture looks better than
that of the US under Obama. Israel has a lower unemployment rate than the
US and the EU.

While virtually every major power responded to the
recession with stimulus plans, instead of panicking and throwing money at
the situation, and pumping up the size of the debt in the process, Israel
has instead worked toward stability and encouraged job growth through tax
cuts. In doing so Israel joined the ranks of countries such as
Czechoslovakia, South Korea and Canada who have cut corporate taxes to
attract business growth, instead of spending wildly on government programs
that do nothing to promote economic growth, as Obama has done.

As a
result of Dr. Steinitz's wise fiscal management, Israel's debt-to-GDP
ratio rose less than a percent since 2008. Meanwhile Obama's spending has
dramatically increased America's debt-to-GDP ratio with the result that it
is climbing at a rate of one percent per month. "The question in this [economic] crisis is not
how fast we can get out of it but at what price," Dr. Steinitz
said. Contrast that with the shrill calls by left wing economists
such as Krugman for the US to spend whatever it takes and rack up any
amount of debt. Government money is not a steam engine toward economic
recovery, rather it is part and parcel of the economic problems that delay
recovery.

While Israel's tax rates still remains too high, a legacy
of a socialist past in which Labor Prime Ministers actively discouraged
businesses in favor of cooperatives, Netanyahu's reform program is putting
Israel on the right track by trying to grow the national GDP, instead of
pushing more socialist programs thinly disguised as economic stimulus
plans, as Obama and far too many other world leaders have done. While the
US has not cut corporate taxes in decades and Obama is actually pushing
companies further out of the country by aggressively targeting corporate
profits, countries around the world such as Switzerland and Israel are
demonstrating that cutting corporate taxes is a better way to attract
business without killing the goose that lays the golden
eggs.

Raising tax rates to punish companies is a sure way to push
them into going abroad, shifting their base of operations to countries
that actually want the jobs and economic productivity that they bring. Yet
that has been the agenda of the prophets and pundits of socialism who have
charged that the recession is proof that capitalism is unworkable and keep
trying to whip up anti-business sentiment in order to enact a socialist
agenda. Destroying free enterprise means destroying freedom by destroying
any possibility of social mobility and economic survival that is not
dependent on government control.

By reducing corporate taxes to 25
percent, Netanyahu will insure that Israel has lower corporate tax rates
than most of Europe, with the exception of Switzerland, Iceland, Ireland
and a number of Eastern European countries. It will also have a nearly 15
percent lower corporate tax rate than the US's outrageous 39 percent, a
figure that has helped drive US companies overseas.

Not all is
sunny in Israel however, chiefly because the government is unable to
control its spending. The lack of a constitution and an official
separation of powers, combined with a radically left wing judicial
establishment, has turned the Israeli Supreme Court into an insatiable
agenda mongering monster that intervenes wherever it sees fit to promote a
left wing political agenda. This has meant an activist judiciary that
interferes in everything from the recipient of the Israeli Prize, to
Kosher supervision in restaurants, to the path of the border wall, and to
every social and political policy where Beinish and her cohorts can
intervene and overrule the government.

Dr. Yuval Steinitz has
called for a bill that would control the ability of the Israeli Supreme
Court on issues where the expenditures would devastate the budget. Such a
bill is not likely to be passed, but Dr. Steinitz has played an important
role by opening a dialogue on the subject. And he has also pointed out
that white collar crime and corruption play a far more devastating role in
draining the economy than has generally been accounted for. Dr. Steinitz's
call for the Israeli Supreme Court to demonstrate some fiscal
responsibility has been met with the usual hysterical accusations of
incitement, a standard response by the Israeli left to any criticisms
leveled against it.

A larger problem is Israel's coalition
government structure in which a parliamentary majority is achieved by
building as large a coalition as possible at the expense of a vast amount
of pork ladled around to everyone concerned. This makes it even more
difficult for Israel to control government spending, than it is for the
United States Federal government, because the Israeli Knesset's no
confidence vote eliminates any real separation between the Prime Minister
and parliamentary budget disputes. The lack of regional parliamentary
representation further entrenches political interests, without tying to
them to anything but their own party.

Netanyahu has had a great
deal of difficulty changing the system and the result is a high debt to
GDP ratio. And while Israel might have avoided the stimulus trap under Dr.
Steinitz, spending cuts represent a virtually impossible battle as
Netanyahu tries to push Israel away from a socialist system in which
everyone feels entitled to government money and assumes that he's a
"freyer", a sucker losing out while everyone else is cashing in. Netanyahu
deserves much of the credit for Israeli's economic reforms, its
privatization, tax cuts and reforms. But socialism has a powerful gravity
well in which social activists, activist judges, rent seeking businesses
and political interests combine to suck the public and the government back
in over and over again.

Netanyahu and Dr. Steinitz have done a good job of shepherding
Israel through the economic crisis, but the worst political crises are
still ahead. The Histadrut, Israel's once nearly unstoppable left wing
trade union which held a death grip on the Israeli labor force, has been
gravely weakened, but is far from gone. It still exercises a vast amount
of power compared to American unions, and its admission of migrant workers
suggests that it may be imitating American unions in reconciling itself to
a changed workforce.

Israel's example does demonstrate that the
best response to the recession is not to panic and work on creating a
business friendly environment, rather than spending like mad in order to
stimulate a debt economy. Because you do not grow an economy by taxing it,
but by letting it breathe.