While welfare policy can serve to reduce income disparity, it exacerbates the inequality of the security and tax burdens. The Jewish non-Haredi sector carries the bulk of both burdens, and the consequences of this will be drastic. It is time for comprehensive and structural change.

Summary

1. The Difference Between Income Inequality And Burden Inequality:
   The discussion of income inequality in Israel relies mostly on conventional measures, such as the Gini coefficient for household economic income (primarily gross income from labor and capital) or for disposable income (which takes into account the direct taxes and transfer payments both paid and received), the relative poverty rate, or wage gaps between different sectors. A deeper analysis also includes the value of indirect and other taxes that households pay (sometimes indirectly) and the value of the services they receive. The Israeli paradox lies in the fact that the effort to reduce income inequality often leads to the increase of inequality in burden. While net incomes converge, the distribution of financing for services and transfers becomes less balanced. The part of the population that enjoys the lion’s share of public services contributes only marginally to state revenues (whether due to low incomes or to sectoral exemptions and benefits), while others not only pay high taxes but also derive low value from the public system. In addition to the tax burden, Israeli citizens contribute to the country’s security by military service; however, here too, not all citizens carry the burden equally. The combination of exemption from service with low employment rates sharpens the sense of unfairness among those who both serve in the army and contribute in taxes.
2. The Demographic Structure Fueling the Imbalance:
   To understand the roots of the paradox, the unique characteristics of Israeli society and economy must be examined. The demographic structure significantly exacerbates the problem: two large populations – the ultra-Orthodox (Haredi) and Arabs – are characterized by low participation rates in the labor market and low income levels. If employment and education trends do not change substantially, the population segment entitled to benefits and public services but contributing little to state revenues will only grow larger. Israeli birth patterns present an unusual phenomenon: a strong negative correlation between parents’ income level and the number of children in the family, unlike most developed countries, where this correlation is weak or even reversed. This reality creates particularly high relative poverty rates among children, even when the family’s welfare level is not harmed and may even increase with its expansion. Another necessary consequence is that the Israeli welfare state grants significant net transfers to low-income households with a large number of children; thus, a considerable portion of the financial burden involved in raising children in large families is effectively transferred to the sectors for whom family patterns, culture, and community are entirely different.
3. Incentive Distortions and Sectorial Political Power:
   Direct taxation in Israel is more progressive relative to other developed countries, so that high earners contribute a large share of the state’s revenues from income tax. Alongside the progressive structure, extensive distortions have been added over the years in the form of sectoral exemptions and benefits. Politically, the proportional electoral system and multi-party structure grant small sectoral parties particularly strong political power that translates into dedicated budgets financed by all taxpayers channeled into housing, education, and community support. The problem is exacerbated by the considerable power of workers’ organizations. In the public sector and in key branches of the economy, strong unions obtain excessive conditions for their members, also at the expense of all taxpayers, so that many transfers and budget supplements meant to reduce social gaps actually constitute benefits for a well-organized minority.
   Heavy regulation, cumbersome bureaucracy, the multitude of ministries and authorities, the high percentage of public sector employees, and the form of assistance to certain production sectors (such as blocking competition to protect local agriculture) lead to heavy indirect taxation and particularly high price levels. Thus, the general public, and especially the middle class, is squeezed from two directions: on one side by significant direct taxation due to their income; on the other, by consumption that is more expensive due to the economic-political structure, without the benefit of subsidies or discounts. In contrast, the population groups that do not bear a significant share of the direct tax burden enjoy generous transfers such as child allowances and subsidized public housing, as well as discounts on private services (such as public transportation or childcare facilities).
4. Dual Payment for Public Services:
   Despite high official state expenditure on public services, Israelis who can afford it tend to spend out of pocket for supplementary or alternative services. In the healthcare system, for example, many turn to private insurance for significantly shorter waiting times and access to advanced treatments. The investment in private healthcare is not offset by a reduction in payment for public services, since it is collected through taxation. Thus, taxpayers end up paying twice. The inefficiency of the public system is characteristic of public education and housing as well.
5. The Social and Existential Threat:
   This is the core of the Israeli paradox: contrary to the conventional conception of welfare policy, money does not necessarily flow from those who have achieved economic and professional success to those whom fate disadvantaged and are in need of assistance. Rather, money flows mainly from one distinct population sector to others, that differ from it in culture, lifestyle, history, spoken language, and fertility preferences. The separate education systems, significant differences in educational content, and the gaps in fertility preferences almost guarantee that this flow pattern will persist in future generations as well.
   The implications of this paradox are not only economic, but political as well, even existential. As the working and taxpaying public experiences growing burden inequality, its willingness to bear high taxes diminishes. This could lead to pressure to reduce progressive taxation and curtail social safety nets, thereby creating a trajectory of increasing inequality in income, standard of living, and equality of opportunity for the next generation, or erosion in the willingness of those with high earning capacity and mobility to continue bearing the economic and security burden virtually alone, thereby undermining social cohesion and the state’s legitimacy in the eyes of its citizens, and even making it difficult to collect the taxes required to finance the high defense expenditures essential for Israel’s continued ability to stand against external threats.
6. The Solution: Comprehensive Reform
   The real challenge for the State of Israel is to find ways that will reduce inequality in burden alongside income inequality:
   Education reform requires encouraging the adoption of a core curriculum in all schools to ensure that the younger generation is equipped with the tools necessary for integration into the modern economy, eliminating public funding for educational frameworks (including for early childhood) that do not advance public education goals, reducing the influence of professional unions that restrict innovation, and fostering flexibility and modernization in higher education to better adapt to the changing needs of the economy.
   Increasing personal and family responsibility regarding fertility preferences requires a significant reduction in benefits and public assistance to large families, in order to create more appropriate incentives and transfer economic responsibility for personal decisions back to families, while still maintaining a basic safety net.
   More equitable military service requires expanding the draft obligation to the IDF, increasing payments to those serving mandatory service, and imposing economic and other sanctions on those who evade service. This reform will ensure a more just distribution of the security burden and thereby reduce the class gaps created by unequal conscription.
   Labor market reform includes abolishing compulsory membership in professional unions, restricting the right to strike in essential services, increasing budgetary transparency of workers’ organizations, and easing employment restrictions in the public sector, thus increasing competition and reducing distortions that harm economic efficiency, and reducing the cost of living.
   Fiscal reform and reforming the public sector require consolidating ministries, significantly reducing the number of government ministers, improving transparency in state expenditures and revenues, reducing the deficit, simplifying hiring procedures for public sector employee and making them more flexible, and eliminating expensive benefits unique to public sector employees and other organized groups. This reform will strengthen public trust in state institutions, ensure more efficient utilization of public resources, and reduce the fiscal burden on taxpayers.
   Tax reform should include reducing marginal tax rates, closing tax loopholes, eliminating exemptions and benefits, equalizing tax credits between different groups, and unifying the collection of income tax and social security to improve administrative efficiency. These steps will lead to a simpler, more transparent, fair, and efficient tax system.
   Regulation and trade reform requires reducing regulation that does not meet cost-benefit tests, removing import barriers that protect inefficient sectors, deregulating the agriculture sector, streamlining building approval procedures, and eliminating directives that distort competition such as “buy blue-and-white” and reciprocal procurement. These steps will increase competition in the economy and contribute to reducing the cost of living.
   Housing reform will require terminating distorted, expensive, and inefficient subsidy programs such as the housing lottery program “Buyer’s Price” (Mechir LaMishtaken), reforming the funding of local authorities in a way that improves incentives for residential construction, and reducing tax distortions on residential apartments. This reform will enable the development of a freer market that will lead in the future to lower housing prices as well.

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