Prosperity in a Capitalist World
The book Welfare in a Capitalist World discusses the law of negative income tax. This study aims to examine the efficiency of the negative income tax model established by law along with other social operating alternatives, and compare it with various existing models in other countries around the world. To do so, I have examined past social programs implemented in the State of Israel and their significant impact on the formation of current legislation.
Efforts that have been made in Israel to minimize poverty and reduce the growing socio-economic disparities among different sections of society have not fully achieved their goals. In the course of time, the State of Israel has implemented various programs to reduce poverty and socio-economic inequality, but they failed and the scope of poverty deepened for various reasons, ranging from the low amount the government was willing to invest in various fields. projects, to program inefficiencies (because it provides fair employment for the poor and vulnerable without treating low levels of human capital). Following the expansion of poverty coverage and the number of people supported by living allowances, a law increasing participation rates in the workforce and reducing social inequality was passed in 2007 (the Negative Income Tax Act).
The goals are: increasing the use of human resources, providing incentives for workers to participate in the labor market, increasing the income that workers at low salary levels can spend without relying on other social benefits, and reducing economic inequality. The rationale for this law is to improve the welfare of low-wage workers by using wage subsidies as a tool to encourage increased participation in the labor market. In this way, the poverty rate among working individuals and families with children will be reduced. provide incentives for workers to participate in the labor market, increase the income that workers at low salary levels can spend without relying on other social benefits, and reduce economic inequality. The rationale for this law is to improve the welfare of low-wage workers by using wage subsidies as a tool to encourage increased participation in the labor market. In this way, the poverty rate among working individuals and families with children will be reduced. provide incentives for workers to participate in the labor market, increase the income that workers at low salary levels can spend without relying on other social benefits, and reduce economic inequality. The rationale for this law is to improve the welfare of low-wage workers by using wage subsidies as a tool to encourage increased participation in the labor market. In this way, poverty rates among working individuals and families with children will be reduced.
The prevailing approach today is the “from welfare to work” approach, as opposed to the passive welfare state approach which provides unconditional benefits and creates economic dependence. It does so by being policy active, which conditions provide benefits by joining the labor market.
My assumption is that welfare policies fail to address poverty and unemployment. Negative income tax laws are the most effective way to overcome the barriers of the lower classes and will bring about a significant increase in their welfare. The basic concept of this law lies in the perception that because there is a minimum salary level for collecting taxes, in the same way a worker whose income is lower than this level will be entitled to additional income as a grant which will be required by income level and number of children.
A preliminary study, conducted by Adi Brender and Michelle Strawczynski of the Bank of Israel in 2005, before activating the negative income tax law, found that a negative income tax could reduce the number of low-income working households by 18%, which is equivalent to 1.3 billion NIS per year, provided that the scope of the grant will be determined by the number of children and based on the income of the higher-income spouse.
The analysis conducted by the research team that accompanied the implementation of the 2010 law, found that the population of employees who were entitled to receive grants in 2007 was around 64 thousand people, and the average realization was 45% of the eligible population. In examining the success of the law, according to the criteria for meeting its main objective, namely poverty alleviation, it was found that a negative income tax helped around 4.5% of recipients move out of poverty.
In addition it was found that about 80% of the benefits provided to families with children went to families in the lowest four deciles of the salary distribution.
I believe that negative income tax laws, as an additional tool in addition to minimum pay and income support, are a viable solution that does encourage people to go to work. The law increases the initial income of low-income taxpayers (both employees and self-employed), and conditions state aid by going to work, without significant budgetary costs and economic exclusions, as I show in the Keynesian model of economic analysis.
In the book Welfare in a Capitalist World, I have confirmed my hypothesis that the Israeli model adopted in the above law is the most reasonable among the models used worldwide, but requires improvement. However, after studying the different models through the comparative laws of several countries, I have concluded that some amendments are needed to adapt them to the Israeli model. I have compared the grant amount between Israel and the US, UK, France and Ireland, and have found that the maximum grant in Israel is significantly lower compared to the countries mentioned above, except for France, where it is as low as in Israel. . Therefore I came to the conclusion that it should be improved in Israel.
I have done an economic analysis based on Keynes’s theory.
I have examined whether providing grants to low-income workers will lead to improvements in working conditions and increased products, as grants will probably lead to an increase in accumulated demand, whether demand for private consumption or demand for investment. Also, I guess one should consider the option of separate calculation while deducting grants due to other spouse’s income, such as the existing income tax laws. Furthermore, the state is responsible for including the component of the allocation of pension funds into the grant to answer the right to the grant at the time the person concerned retires.
When the person retires, the grant will help his welfare and get him out of the cycle of poverty. I also emphasize the need for thorough scrutiny and prosecution, aiming to avoid a situation where grants will become a means to subsidize entrepreneurs.
I recommend adding a clause for eligibility checks, clauses that will check employee assets, including apartments used for residence, to prevent a situation where someone with high value assets is entitled to a low income tax grant. In addition, the grant must be given within a short time of the implementation of the workforce, otherwise the incentive to work will be damaged.
Dr. Itamar Cohavi, CPA Certified Accountant & Advocate
Author: Dr. Itamar Cohavi has been a lecturer in “advanced managerial accounting” and “cost control” courses at the Faculty of Industrial Engineering and Management at The Technion in Haifa for more than 16 years. He received his PhD from the University of Haifa at the Faculty of Law.
By profession, CPA Certified Public Accountant and Economist (approximately 21 years old), and Advocate.
He has a law office (CPA) at the Government Campus in Haifa. Specialties: tax law, commercial law and labor law.
Author of “Prosperity in a Capitalist World”, a book published by the Globes Journal.