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Welfare in a Capitalist World

Welfare in a Capitalist World

 

Dr. Itamar Cohavi, CPA-Certified Public Accountant & Advocate

 

 

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 is a lecturer of "advanced managerial accounting" and "cost control" courses at the Faculty of Industrial Engineering and Management at The Technion in Haifa for over 20 years.

In addition, from the academic year 2014/15, he is a lecturer at University of Haifa, Faculty of Management at Department of Business Administration - MBA course "Accounting principles".

He received his PhD from the University of Haifa at the Faculty of Law.

By profession he is CPA-Certified Public Accountant and Economist (about 23 years), and Advocate.

He has a law (CPA) office at Government Campus in Haifa. His expertise: tax law, commercial law and labor law.

Author of "Welfare in a Capitalist World", the book which was published by Globes Journal.

Office Location7 Pal Yam Government Campus, Haifa, Tel: 04-8621350, Fax: 04-8621349, Mobile: 050-5443671

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