The book Welfare in a Capitalist World deals with the negative income tax law. The study aimed at examining the efficiency of the negative income tax model that is set by law along with other operating social alternatives, and comparing it with various existing models in other countries around the world. In order to do so, I have examined the past social programs applied in the State of Israel and their significant impact on establishing the current law.
The different attempts that have been conducted in Israel of minimizing poverty and reducing the growing socio-economic gaps among different parts of society have not fully achieved their goals yet. In the course of time the State of Israel has operated various programs for reducing poverty and socio-economic gaps, but they have failed and the scope of poverty has deepened for various reasons, ranging from the low sums the government was willing to invest in various projects, up to the inefficiency of the programs (due to providing just employment to the poor and weak population without treating the low human capital bound). Following the expansion of the scope of poverty and the amount of citizens who are supported by a living annuity, the law of increasing the rate of participation in the labor force and reducing social gaps was legislated in 2007 (The Negative Income Tax Law). Its targets were: increasing the capability of using human capital, providing an incentive for workers to participate in the labor market, increasing the disposable income of workers in the low salary levels without the need of relying on other social allowances, and reducing economic gaps. The rationale of this law is improving the welfare of low-wage workers by using a wage subsidy as a tool of encouraging their increased participation in the labor market. In this way the poverty incidence among working individuals and families with children would decrease.
The prevalent approach nowadays is the approach “from welfare to work”, which is opposed to the passive welfare state approach that provides unconditional benefits and creates an economic dependence. It does so by being an active policy, which conditions providing benefits by joining the labor market.
My assumption is that the welfare policy fails to cope with poverty and unemployment. The negative income tax law is the most effective means of dealing with the obstructions of the lower classes and would bring about a significant improvement in their welfare. The basic concept of this law lies in the perception that as there’s a minimum salary level for charging tax, in the same way a worker whose income is lower than this level will be entitled to an additional income as a grant which would be conditioned by the level of income and number of children.
A preliminary study, conducted by Adi Brender and Michelle Strawczynski from the Bank of Israel in 2005, prior to activating the negative income tax law, found out that the negative income tax may reduce by 18% the number of low income working households, which is equivalent to 1.3 billion NIS per year, providing that the scope of the grants would be determined by the number of children and based on the income of higher-earning spouse.
An analysis conducted by a research team, which has accompanied the law implementation in 2010, found that the population of employees entitled to the grant in 2007 was about 64 thousand people, and the average realization rate was 45% out of the entitled population. In the examination of the success of the law, according to the criterion of fulfilling its main goal, i.e., reducing poverty, it was found out that negative income tax helped about 4.5% of the recipients to get out of poverty.
In addition it was found that about 80% of the allowances transferred to families with children were given to families in the four lowest deciles of the distribution of salaries.
I believe that the negative income tax law, as an additional tool alongside the minimum salary and Income support, is a proper solution which indeed encourages people to go to work. The law raises the initial income of the low-income taxpayer (both employees and self-employed), and conditions the state’s assistance by going to work, without significant budget costs and economical exceptions, as I demonstrated in the economic analysis of the Keynesian model.
In the book Welfare in a Capitalist World I have confirmed my hypothesis that the Israeli model which was adopted in the above-mentioned law is the most reasonable model among the models used all over the world, but it calls for improvements. Nevertheless, after studying different models through comparative law of several countries, I have concluded that several amendments are required in order to adjust it to the Israeli model. I have compared the amount of the grant between Israel and the US, Great Britain, France and Ireland, and have found out that the maximal grant in Israel is significantly lower in relation to above-mentioned countries, except for France, in which it is as low as in Israel. Therefore I have come to the conclusion that it has to be increased in Israel.
I have conducted an economic analysis based upon Keynes theory. I have examined whether providing a grant to low income workers would bring about an improvement in the state of employment and increase the product, since the grant would probably cause an increase of the accumulated demand, whether a demand for private consumption or demand of investments. In addition, I suppose that one has to consider the option of a separate calculation while reducing the grant due to the incomes of the other spouse, like the existing legislation of the income tax act. Furthermore, the state bears responsibility to include the component of pension fund allocation within the grant in order to answer the entitlement to a grant when the person retires.
When the person is retired the grant would help his welfare and leave him/ her out of the circle of the poverty. I also emphasized the need of conducting a thorough examination and enforcement, aimed at avoiding the situation in which the grant would become a means of subsidizing the employers.
I recommend to add a clause to the examination of eligibility, a clause that would examine the employee’s assets, including the apartment used for dwelling, to prevent a situation in which a person with high value assets would be entitled to a low income tax grant. Moreover, the grant should be provided in a short period of time of the execution of labor, otherwise the incentive to work would be damaged.
Dr. Itamar Cohavi, CPA-Certified Public Accountant & Advocate