Monday, April 07, 2008

Israel: Dysfunctional Tax Code Revolutionized

It has been part of the US tax code for over 50 years: the child care tax deduction. But in Israel, it has never existed, and has crippled Israeli productivity by forcing 2-income families to pay onerous sums, oftentimes in the underground economy, to child care providers, with no compensation for the expense. But yesterday, in Tel Aviv district court, a judge ruled in favor of a suit filed by working mom Vered Pery against Israel's Tax Authority (the equivalent of the American IRS). With this single judicial ruling, a social revolution has taken place overnight. For in one fell swoop, the Tel Aviv court has declared that deducting child care expenses for working parents is now the law. While in the past the Israeli government had provided some subsidies and credits for working mothers, there has been no recognition of the problem as a professional employment expense. With yesterday's ruling, Israel's workforce dynamics have been radically altered.

This ruling also highlights some points made in this week's The Economist, the British newsweekly which devoted a special 14-page survey this week to Israel, which I recommend as essential reading for anyone who is interested in understanding current economic and social trends in the Jewish state. In its leader, The Economist describes Israel as "the dysfunctional Jewish state," and it is hard to argue with that snap characterization. There are lots of things that are working well in Israel in 2008, but there are lots of things on the verge of going wrong. So it has always been. Is the cup half empty or the cup half full? A decade ago, I made fun of the contradictions in Israeli culture with my sabra friends by jokingly referring to Israel as "Bangladesh" -- by which I meant to point out the ridiculous irony of the ultra-modern gleaming skyscrapers looming over the horse-drawn carts, all on the same street. A decade later, as I walk down a suburban street and steal WiFi from a half dozen homes, and the gleaming skyscrapers are no longer accompanied by mule drawn carts, I have to admit that the Bangladesh joke is no longer valid. But, as The Economist points out, in the last decade there has been no real move from poverty to the middle class, the education system is failing to produce a new generation of bright and productive citizens, and public R&D and investment in higher education has been virtually non-existent. Most telling for me was The Economist's description of Israel's current technological expansion as essentially a one-time boomlet tied exclusively to digital signal processing and broadband applications. In the near future, the global internet infrastructure will be essentially finished and built. While it was going up, Israel was a leading force, but this was because these communications technologies were something that the Israeli military desperately needed, and therefore invested in heavily. (Some of Israel's most succesful public hi-tech companies were spin-offs from the military-technological labs.) After this i-infrastructure is built, Israel will prove to have little to offer in the way of the next wave of high technology startups.

In other words, Israel's 2nd hi-tech bubble will soon burst. So says The Economist. Read it for yourself.

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