International Business : Capital Gains Uncertainty Proves Taxing to Israeli Investors : Mideast: Prime Minister Yitzhak Rabin is tight-lipped about proposal, but some say he may be backing away from it.


The fate of a planned capital gains tax has dominated the news in Israel this week, stealing headlines from the Nobel Peace Prize, guerrilla violence and an unprecedented trip to Japan by Prime Minister Yitzhak Rabin.

To tax or not to tax--the question, coming just weeks before the levy is due to take effect, has stirred fevered debate and sent the stock market on a roller coaster ride.

The uncertainty has been heightened by the absence of Rabin, who is visiting Japan and South Korea.


The tax proposal has upset investors in Israel’s active stock market, long viewed as the only place where heavily taxed and inflation-ravaged Israelis could make money and legally keep their earnings away from the tax collector.

Hounded by Israeli reporters accompanying him from Oslo--where he received the Nobel Prize over the weekend along with Foreign Minister Shimon Peres and PLO leader Yasser Arafat--a tight-lipped Rabin has refused to comment on the tax, a 10% levy on stock trading profits approved by Parliament last month.

But banner headlines in Israeli newspapers, quoting sources close to Rabin, portray him as leaning toward postponing implementation new the tax, which is scheduled to take effect Jan. 1.

The flurry of reports prompted a peeved Rabin to deny having authorized anyone in his entourage to speak about the tax.

The unidentified sources were quoted as saying Rabin was weighing three options: delaying the tax for one to two years, a shorter delay, or making the tax contingent on comprehensive tax reform.

“No one in my entourage was authorized to speak in my name on the subject of the bourse,” Rabin told Israel Radio, adding that he will speak about the tax when he returns home early next week.


Rabin publicly resisted the tax for months, only to endorse it when it was announced in August.

He stunned Israelis at the time by saying they should not expect the country’s prime minister and finance minister “to tell the whole truth” on tax policies.

Army radio said recent opinion polls showing the tax had cut deeply into Rabin’s popularity sparked his reported change of heart on implementing it. He faces reelection in 1996, and his Labor Party is already in trouble over the peace agreement with Arafat.


Radio shows have been flooded by telephone calls from frustrated Israeli investors opposed to the tax.

“The average guy on the street has money in the Israeli stock market, whether through direct investments or through mutual funds and savings plans, and has lost a lot of money in 1994,” said economist Jonathan Katz of consulting firm Capital Holdings.

Many Israelis were encouraged by easy credit available from banks last year to take out loans to buy stocks.


They then watched their investments dry up as the benchmark Mishtanim Index fell 30.5% since the start of the year.

Katz said the capital gains tax alone, which was announced in August, cannot be blamed for the market’s decline.

“But people are looking for something optimistic to get the market out of its slump,” he said.

“And it’s a game of politics now. The Labor Party has seen its popularity decline.”

Finance Minister Abraham Shohat, a strong supporter of the tax, said he managed to speak to the elusive Rabin by telephone Tuesday and told him party members still back the tax.

During a meeting of Labor deputies Monday, the brouhaha over the tax provoked an outburst from Transport Minister Yisrael Kessar, Rabin’s temporary replacement and the only Cabinet minister noted for his customary silence.

“Every country has a capital gains tax!” Kessar shouted.

“Why shouldn’t Israel?”