THE WOUNDS WILL HEAL- BUT SLOWLY - 31-Jan-95

(Commentary by Sever Plocker, "Yediot Ahronot", Jan 31, 1995, p.1)

The eulogy for the capital gains tax is both an economic and political one.

The Government believes that it can cleanse itself from the shame of the capital gains tax like swans coming out of a lake it will just flap its wet wings, and its feathers will become instantly dry and fresh. No way. During the capital gains affair, the opposite of the ugly duckling story happened to the Government. The beginning was clean, and the end was dirty. Just like a truck driving through a deep puddle splashes black mud on all by-standers, the capital gains tax affected everyone who dealt with it, came in contact with it, gave birth to it, and killed it.

The wounds will heal, but slowly. The damage will last for years.

* THE STOCK MARKET'S STANDING HAS BEEN AFFECTED: It was not the tax that paralyzed the stock exchange, since not one cent of tax was actually paid or transferred to the Finance Ministry. Fear of the tax paralyzed it. Fear of the tax reduced the amount of business transactions, terminated stock issues, canceled privatization, and scared away hundreds of thousands of Israelis from provident and mutual funds. NIS 15 billion flowed out of the stock market.

Moreover, the general public lost confidence in the stability and immunity of the securities exchange, its life-sustaining drug. Many months will pass until the small investor, burned and wounded in 1994, decides to put his money back in stocks. Tens of thousands of citizens lost something some only lost paper profits, while others lost real savings. They have become much poorer and bitter, and have a serious question for the Government and the leadership: Why did you force us to swallow the capital gains tax "frog," if we were just going to vomit it up now? This is a question of voters.

* INVESTOR SECURITY WAS IMPAIRED: No, the citizen says, the stock market did not fall; the government caused its collapse. Thus, the government must now invest in the investors. It is not enough to call them back to the stock exchange, or to tell them that the dragon has fled. In order to rehabilitate the stock exchange, the Finance Ministry must accelerate privatization, send the Knesset all the securities bills that are stuck on the shelf, curb inflation, cut the budget, and enable a drop in interest rates.

This is a protracted, step-by-step healing process. I would not advise anyone to run to the bank or their broker today or to buy any available stock. It would not be worthwhile, from either a business or psychological standpoint. Stock indices rise when there are enough people who want to buy stocks and not necessarily when companies issuing stock release profitable statements of account. I do not envision any great demand for stock in the near future. I do envision hesitation, extreme caution, and precise profitability considerations.

It is known that, on the stock market, the mountains are even higher on the way back. Thirty years ago, then Finance Minister Pinhas Sapir tried to impose a capital gains tax on the Tel Aviv Stock Exchange, which responded by collapsing. Six months later, Sapir retreated and cancelled the tax. The market took six years to recover.

* THE FINANCE MINISTER'S STANDING HAS BEEN DAMAGED: Rabin has given Beiga Shochat a conditional divorce. Rabin is now sure that his senses, which were opposed to the tax, were healthier than all of the professional forecasts of Shochat and his staff. In the future, Rabin will prefer to rely upon himself and on two other confidants, Shimon Sheves and Haim Ramon, who opposed the tax from the outset. They are neither interested parties nor millionaires, and Rabin views them as the voice of the people. Rabin will not forget that Shochat and Company caused him to fail, professionally and politically. Shochat's days in the Finance Ministry will come to an end with the next scandal. If only for reasons of political hygiene, the Finance Minister should have laid his letter of resignation on the Prime Minister's desk yesterday afternoon: "Mister Prime Minister," Shochat should have written, "I have deceived you; I am leaving."

Rabin, almost certainly, would have rejected the letter. Beiga would have come out a gentleman, and Rabin an officer. But Shochat did not do this, and again made a mistake. The Finance Minister, who the people view as holding on to power with all his might, is a finance minister whose power is diminishing. A finance minister working on borrowed time.

* THE PRIME MINISTER'S STANDING HAS BEEN HURT: Rabin was forced to renege on his promises twice. Twice, his credibility was cracked. Only six days after Rabin dramatically announced the implementation of the capital gains tax, he understood that he had been misled. On 16 August, in an urgent evening phone call, he beseeched Shochat to alter the tax. Rabin folded. The capital gains tax's dance of life and death continued for another five months. Only on 30 January, after Rabin had publicly pounded him with fire and brimstone, did the Finance Minister find fit to retract the tax but not before implicitly accusing the Prime Minister and the Government of surrendering to special interests and populists. Where were Rabin's unchallenged authority and quiet leadership? The experiment on the live flesh of the stock market did not kill the Prime Minister's prestige, but did not strengthen it either. People Rabin's age do not forget double contempt; they carry grudges.

* THE GOVERNMENT'S STANDING HAS BEEN AFFECTED: Most ministers acted like robots. Last August, they were told that the tax was vital and just, that it should not be changed at all; they voted in its favor. In November, they were told that changes to the tax were most vital; again, the ministers voted in their favor. At the next Cabinet meeting, they will be told that the tax is actually superfluous and they, the respected ministers, will again raise their hands in surrender. Do they not have their own opinions?

* THE ISRAELI ECONOMY HAS BEEN DAMAGED: Foreign investors, heads of foreign banks and directors of international corporations have (or will) all read about the adventures of the distant Israeli stock market. It will make them laugh until they cry. Then they will tell themselves that the Israelis are not serious. They have not yet matured and are not ready for our investments; this is not how a responsible economic administration behaves.