This short article is not to be read by depressives. The much-repeated saying by Benjamin Franklin is still so true: “Nothing can be said to be certain in this world, except death and taxes.” And this article is about both depressing subjects.
Taxation is a necessary evil. We need it to keep the country’s services going and to help the weaker parts of our society. But every year or two proposals are mooted to raise taxes in one form or another and in particular some political leaders look at the seemingly untapped resource of inheritance taxation.
Imposing an inheritance tax in Israel may sound like a good idea but upon closer examination many unexpected considerations arise.
“Let’s Soak the Rich” has always been a popular slogan of some politicians. Anyhow anyone leaving less than ten million shekels in assets will not suffer this tax. Or is it two million? Or one million ? These figures have seriously been mooted.
And do not forget, that once imposed, taxes are virtually impossible to remove. Remember the innocuous introduction of Income Tax in England? Modern income tax was introduced in the Britain in 1803 when hostilities with France recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. Opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal. And in keeping with that decision income records were publicly burned by the Chancellor of the Exchequer, but, surprise, copies were retained somehow in the basement of the tax court. And these formed the basis of the reintroduced tax shortly after.
The original tax rate was one penny in the pound. When you consider that in those days the pound had 240 pennies, that was a miniscule amount. But not to worry, once the government realized this was a source of income, we have reached in the past 70% or even 80% income tax.
And every now and again, some politician or another is in favor of introducing a renewed Inheritance Tax in Israel. In some ways, this idea is a triumph of hope over experience. Israel has already had an Inheritance Tax which was abolished in 1984, and for good reason – it cost more to levy the tax than any benefit created to the State.
And then there is the law of unintended consequences. Taxing inheritance sounds like a good idea. Why should immense wealth transfer itself generation after generation when the gap between rich and poor in Israel is growing? People in favor of the tax point out that many countries have inheritance tax, the UK has a 70% rate, Belgium has 40%. Similar taxes exist in France and the US, so why not Israel?
But Israel attracts tens of thousands of new residents who have come to live in Israel precisely because there is no Inheritance Tax here. The invisible earnings that these people produce for the country amount to billions - yes, billions. People escaping the onerous tax regime in their own countries come to Israel after they sell their businesses abroad. They are still fairly young, in their Fifties and Sixties, and they bring with them their fortunes and their skills in creating businesses and jobs and provide Israeli society with a richly expanded international business structure contacts and opportunities.
Also, there is the moral aspect: is it right to tax money on which the deceased has already paid tax throughout his life? This kind of punitive taxation often shrinks the tax base rather than increase it.
And the wealthy will employ legions of lawyers and accountants and advisers, which will enable them, through trusts and/or foreign companies, to transfer their wealth to the next generation without paying tax.
So who will be left holding the baby? The middle classes. Those of us who work hard, serve in the army , pay taxes, educate our children, look after aged parents, and are left with a little money or maybe even a flat or two at the end of of life.
The bar is set low – going down to NIS 2m. That means that anyone who leaves NIS 2m. and upwards has his inheritance taxed. With the price of real estate being what it is, almost the entire middle class in Israel will fall into this tax rubric and their children will have to find the money to pay the tax, undoing decades of family effort to establish a reasonably comfortable existence.
A further unintended consequence of such a law will be to force people to sell assets at a late stage in life or gift assets to children or other heirs in their lifetime.
Giving away your assets in your lifetime is a very bad idea.
As we grow older, we need more money, rather than less money. All you have to do is to look at Shakespeare’s King Lear, who gave away his kingdom to his daughters in his lifetime and was subsequently left indigent.
As you grow older you do not want to be dependent on your children, but a high inheritance tax will cause enormous pressure to be brought by potential heirs, to gift assets during their lifetime in order to avoid tax. I have seen this many times when dealing with the estates of foreigners who have assets in Israel and who are subject to heavy Inheritance Tax in their state of jurisdiction where their children have put unconscionable pressure on them to give away their assets.
So let us not rush to tax. And to the government we say – think twice!
Dr. Haim Katz and Adv. Sam Katz are senior partners in a law firm based in Tel Aviv and Jerusalem. office@drkatzlaw.com