February 22, 2006

Follow the VAT

In the Los Angeles Times today, Amira Hass points out that Palestinians are currently being robbed of their rightful tax revenue by the Israeli Cabinet:
At the ports, Palestinian importers are required to pay the Israeli authorities the value-added tax of 17%, as well as whatever custom taxes are due on goods that come in on their way to the West Bank or Gaza. These transactions (along with direct Palestinian transactions with Israeli firms and merchants) last year yielded revenues of $711 million.

But whose revenues are they?

To judge by the actions of the Israeli Cabinet on Sunday, the money belongs to Israel. The Cabinet announced that it was going to withhold Palestinian tax and customs revenues, at least for the moment, as a response to Hamas' electoral victory. Until the money is released — if it is released — the Israeli treasury will earn the interest.
It's a real problem; under the Oslo Accords, the revenue belongs to the Palestinian Authority—it's not Israel's money to withhold. But as it happens, I don't think Hass goes anywhere near far enough. Without getting into too much finger-pointing, it seems fairly straightforward the tax and tariff system set up by Israel has always been inherently devastating to the Palestinians, regardless of whether the Israel Cabinet is withholding funds or not. The entire system's a travesty.

After 1967, of course, Israeli markets were integrated with the much smaller economies in the West Bank and Gaza Strip. Firms in the smaller economy were run out of business as they were forced to compete, unprotected, against more advanced Israeli industries. Israel also put in place a customs union in 1967 that increased tariffs fourfold in the combined territories—primarily in order to protect Israeli industry. But the net effect was that the Palestinian territories were forced to shift trade away from other Arab states and towards Israel, and industries lost their competitive edge in international trade as factors of production became more costly.

Now that didn't have to be a terrible thing for the Palestinians, necessarily—after all, the occupied territories also theoretically could "benefit" economically, somewhat, from new opportunities to work in and trade with Israel. (Among other things, Palestinians working in Israel saw a quick rise in money income.) According to economist Fadle Naqib, "In the first decade [after 1967], Palestinian GDP per capita grew from nine percent of that of Israel to fifteen percent."

But after that initial decade, the ratio started declining, for several reasons. Palestinians in the West Bank and Gaza increasingly lost control of their natural resources—especially land and water (by 1987, settlers were using about 50 percent of the water in the West Bank, despite being only 10 percent of the population)—which hurt both Palestinian agriculture and limited industrial expansion in the territories. Second were a variety of trade restrictions (Palestinians weren't allowed to import many advanced technologies, for instance) and licensing restrictions on business activities by the Israeli military administration. Many of these placed heavy limitations on what Palestinians could import and export. Third was the underfunding of vital infrastructure in the occupied territories, which devastated the Palestinian economy.

Fourth was the VAT system, whose funds were only transferred to the Palestinians themselves after Oslo in 1993. In essence, an explicit system was created where the Palestinian economy became entirely dependent on Israel. (90 percent of all Palestinian imports come from Israel; no accident this.) Naqib estimates that the net effect of this resource transfers can amount to about 15 percent of Palestinian GNP to Israel in any given year.

Now some of these things changed in 1993, but in reality, it was less than supposed. Some of the restrictions on Palestinian exports were removed, and the Palestinian Authority now has (very) limited ability to set its own tariffs, but in practice Israel still controls Palestinian trade. Funds from the VAT, meanwhile, are technically transferred to the PA (at least until last month). But this doesn't stop the resource transfers to Israel. Another study noted that, in practice, most Palestinian wholesalers and firms must use Israeli traders to import from the rest of the world, and the taxes collected on these traders often go to Israel, rather than the Palestinians. The study estimated that because of this practice, Palestinians forego about one-third of all tax revenue, or 3 percent of GDP.

Add to that the fact that the PA ran the territories in the most corrupt manner possible, as well as the effects of the intifada and the Israel response, and the fact that the "security barrier" has gutted the territories, and it's no surprise that the Palestinian economy has imploded—unemployment is now as high as 50 percent, and foreign aid is the only thing preventing outright collapse. As for day-to-day life, Richard Ben Cramer described the effects of all these restrictions pretty well in How Israel Lost:
Let's take the case of a Palestinian who is partner to no one, save perhaps his wife: he is a head of household, who has provided for his family, as honor requires, by his labor—it doesn’t matter what labor: say, he ran a shop in Gaza. He's done well enough to have a house, and now, in the fullness of time, his son must wed. Except the son doesn't have a job—what job? So the father must construct an addition to the house. Honor requires no less. And the construction will require, let's say, some gravel. And the gravel must come from Israel—that's quite a business in Israel.

Except this Israeli gravel will cost our hard-pressed shopkeeper twice what it costs in Israel. Because there's only one place to buy Israeli gravel—a legal monopoly run by and for the princes of the PA. And, of course, the new rooms will require some lumber—obtainable only from a similar monopoly (original provenance—a supplier in Israel)… and cement (same story)… and the steel bars to reinforce the cement… Our shopkeeper will pay maybe double the price for every item he'll need. Or, to put it another way, his every occasion of normal need will be twisted to provide commerce for Israel, and pure profit (it adds up to billions each year) for the Tunisians [in the Palestinian Authority].
Right. Lots of blame to go around. Still, it seems that while Amira Hass has identified a real scandal—that Israel is currently withholding $711 million that belongs to the Palestinians—that's definitely the least offensive part of the economic set-up at work here.

Continue reading "Follow the VAT"...
-- Brad Plumer 8:57 PM || ||