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Tel Aviv subway tax sets a dangerous precedent – opinion

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‘How do you make a small fortune in Israel? Come with a big fortune. “In the 40 years or so since its heyday, the joke has been almost forgotten. Capitalism and an open market have created a phenomenal wealth. However, the joke is dusting off and it is about to come back.

Half of the cost of the Tel Aviv subway will be financed by a tax on property owners who are within 800 meters of a station. A bill passed in the Knesset instructs that they pay 75% of the increase in the value of their property. (See Globes: “The Knesset Decides Local Property Owners to Assist in Metro Financing,” October 18). The government’s justification is the generous building and improvement rights that will be granted near the subway lines.

The unique nature of the tax is that it is not on income or realized capital gains, but on unrealized capital gains. A person pays tax not on money he has received, but because the paper value of his assets has gone up.

Even in the U.S., Democrats have only debated, but not introduced, the so-called billionaires tax on unrealized assets to help fund trillions of dollars in new spending. Opponents of the tax say it will hurt economic growth. The paper value of their assets before they have money in their hands.

There is also a fundamental difference between the billionaires’ tax bill and the bill that passes in the Knesset. Billionaire tax advocates point out that the people he is targeting have huge capital in stocks, which are very liquid. In contrast, the subway tax is directed at an asset, an asset that is not liquid. And the billionaire tax, if it ever happens, will focus on the unrealized assets of huge capitalists, as opposed to the subway tax, which haunts ordinary working people.

Tel Aviv Light Rail Carriage (Credit: WIKIMEDIA COMMONS / YNHOCKEY)

Property owners affected by the subway tax will be forced to take hundreds of thousands of shekels from their savings or pension funds. If these are not options, they will have to borrow the money and pay interest on the loan or sell their property. The latter means moving away from their friends and the communities they may have lived in for several decades.

The tax is not cruelly fair. Property increases are already taxed by higher local property taxes and higher capital gains when the property is sold.

Many residents will never use the subway, whether it is because of age, disability, comfort or lifestyle but will have to pay the bill. Those who will benefit the most will be out of town, coming to shopping, business, medical appointments and leisure. All they will have to pay will be the fare, perhaps covered in an existing travel ticket anyway.

Apartments within 800 meters of the station will be tax deductible while neighboring units outside will be completely exempt. Most likely, the tax will apply immediately, or will apply over many years, even though the subway will not be ready for more than a decade. During this period, there will be massive disturbances, dirt, construction work, traffic and noise.

The local authorities, who will determine how much the property values ​​will cost, are biased of course, as they have an interest in raising as much money as possible. Market value is the only true index. The 75% rate is ridiculously high compared to tax rates in the Western world. And there is nothing to stop the government from changing the tariff, or in fact the 800-meter law when the project necessarily passes the time and budget.

It is also conceivable that when people sell to evade tax, they will have to do so at a great discount. The market may be flooded with sellers, and potential buyers will be put off by the tax, especially since they may not know what their exposure will be in the end.

The London and New York subways, built in the late 19th century, were initially funded by private companies. Everyone had a sustainable business model. If the government thinks the subway cannot be funded by expected revenue from train tickets, and other indirect tax revenue due to business growth, it puts a serious question mark over the entire project.

The bigger problem, however, is that once a tax on unrealized income is introduced, no one with assets will be safe. This applies whether these assets are assets, shares or private businesses. There will be nothing to stop a finance minister from marketing himself as a modern-day Robin Hood and introducing unrealized capital gains taxes anywhere and everywhere to fund budget deficits or projects that will never pay for themselves.

Tel Aviv residents may apply to the Supreme Court, which abolished the third apartment tax. The tax obliges the owners of three or more properties to pay NIS 1,500 per month for each of them, regardless of the amount of the rent, in addition to other taxes.

In a personal relationship, trust is essential. Destruction of trust and the relationship is gone. Also, if confidence in the tax system and government is eroded due to new, modern and unexpected taxes, and taxes on unrealized gains, the consequences for Israel could be catastrophic. People will not have confidence about their economic future. The increase will be affected, investments will be reduced and people’s ideas and inventions will be taken elsewhere.

The fact that the Tel Aviv subway tax was pushed in the Knesset without public debate or genuine opposition is a serious warning sign of what might come.

The author immigrated to Israel in 2009 from London. He develops software and lives in Ramat Beit Shemesh.

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