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 30 years until 10/2019.
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 30 years), Advocate and notary.
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 Location: 7 Pal Yam Government Campus, Haifa, Tel: 04-8621350, Fax: 04-8621349, Mobile: 050-5443671