Capitalist Yet Socialist?

Until recently, the Kibbutz movement was the hallmark of Israeli society. In fact, kibbutzniks considered themselves the Israeli societal elite. In contrast to the European Jew, the new Jew living in the land of his forefathers toiled in the desert sun to make the desert bloom. These ideal-driven farmers were strong, industrious, and accomplished what was deemed impossible. In the tradition of the socialist-Zionist Kadima movement of 1889, the kibbutzniks created their own socialist society that was part and parcel of greater society. These pioneering men and women created a socialist society from the ground up.

Many of the Zionist elite were kibbutzniks. For instance, Levi Eshkol started Kibbutz Deganya Bet in 1920. With his strong experience and immersion in organized labor, Eshkol later started the Histadrut, the Israeli labor union. David Ben-Gurion, another kibbutznik, retired to Kibbutz Sde Boker in the Negev to settle the desert.

The Israeli government has and still promotes the kibbutz society. The current economic incentives of working and living on a kibbutz are apparent, which seemingly stresses its importance in the fabric of society. Currently, more than 270 kibbutzim dot the Israeli landscape, enjoying economic benefits while not contributing significantly to Israel’s ongoing economic success. Why the special treatment?

Israeli tax law grants kibbutzim and their members favorable treatment. (Income Tax Ordinance (New Version), 1961, §§ 54-58A, 6 Dinei Yisrael 120 (Isr.)) The system calculates kibbutz taxation in two phases: In phase one, which has no tax liability, the kibbutz accounts for its income as a business, which includes all its business activity and income of members not living on the kibbutz; that accounting is carried into phase two, wherein the kibbutz’s business income is imputed equally to its members to determine theoretical individual liability. At this phase, individual credits, deductions, and other benefits are calculated. However, members hold no personal tax liability; instead, the kibbutz is liable for the combined taxes of its members, but not for its business income. In this way, Israeli law treats a kibbutz as a reverse flow-through entity for tax purposes.

The unique feature of this tax scheme balances Kibbutz ideology with its market features. The tax scheme does not view members as employees of the Kibbutz or as shareholders deriving taxable benefits; instead, despite Kibbutzim having market-like features, it is viewed as a family unit. Members who provide otherwise taxable services to other members are not taxed. At the same time, kibbutzim have a nuanced tax burden per the kibbutz’s market activity.

Economist and Nobel Laureate Gary Becker criticized the kibbutz movement as a failed experiment for not achieving a high level of economic productivity. Unlike other socialist projects surrounded by hostile capitalism, kibbutzim were the elite of a socialist-Zionist society. Kibbutzim only survived because they abandoned their staunch socialist ideals, e.g. disallowing personal ownership of property, and incorporated capitalist objectives.

Moreover, the electorate supports capitalists and their ideologies. Prime Minister Binyamin Netanyahu worked as a management consultant alongside Mitt Romney; current Machane Hatzioni leader Yitzchok Herzog was a corporate lawyer. Ben-Gurion and Eshkol would reject those two as members of their kibbutzim. Nonetheless, one will likely head Israel’s next ruling coalition.

Furthermore, capitalistic ideology governs Israeli economic policy. The Israeli government refers to its economy as “one of the most resilient and technologically-advanced market economies in the world.” The Israeli economy gained fiscal traction in 2006 through currency devaluation, which fulfilled its objective of triggering a boom in technology exports. Creating market share through currency devaluation is a capitalistic endeavor.

Yet, as demonstrated through the kibbutz tax scheme, the government still promotes kibbutzim. While providing certain sectors with tax breaks is commonplace-e.g. a municipality luring a large corporation to relocate through favorable tax breaks-those breaks are designed to stimulate the municipal economy as a whole. In contrast, kibbutzim do not stimulate economic growth as a whole; rather, they are tagged as economic failures.

The socialist-Zionist Kadima movement sought to create a new, powerful Jew. Israel’s current position harkens back to pre-war Budapest when 60 percent of doctors, 55 percent of bankers, and 50 percent of lawyers were Jewish, despite being only 33 percent of the population. Jews were also overrepresented in commerce. Both Israeli economic policy and its electorate have rejected the “new Jew” who toils to make the desert bloom and instead embraces the pre-war Jew of Hungary. If so, why does the government continue to promote the kibbutz model through tax favoritism?