In a new paper that was published on the Bank of Israel website, “Tax Rates on Labor Income in Israel, an International Perspective: 2006-2007″ by Adi Brender, several interesting developments were noted:

• In the past three years, the average tax rate on wages in Israel has fallen for most income levels, while in developed countries it has risen on average.
• However, for the 2% of Israeli workers at the highest levels of income, the tax rate in Israel is higher than in two-thirds of the countries surveyed.
• In the tax code, Israel offers tax benefits for parents, which are most significant at low levels of income. However, about 75% of Israeli families with children do not fully utilize the tax benefits because the tax credits are normally only given to the mother.
• The report cited economists at the research department of the Bank of Israel who suggested that the characteristics of the tax system – high tax threshold and a relatively steep rise in the marginal tax rates – encourage entry into the workforce, though they reduce the incentive to increase the level of employment and the investment of effort to improve wages, principally for those with medium and high incomes, above 10,000 shekels a month. Workers at these income levels have also benefited fewer from reductions in tax rates in recent years.

The detailed reports tries to summarize the impact of some of the recent changes in the tax structure. While it is normally helpful to lower the tax burden on the population, it is interesting to note that for lower income families, there is a limited benefit for child credits because of the quirk in the law that only gives the credit to the mothers. And, on the other end of the financial spectrum, there is a real disincentive for talented workers to push ahead because of the confiscatory tax that they face as soon as they are earning more than the equivalent of a few thousand dollars per month.

Of course, the onerous tax burden does not just discourage people from working, but when it comes to spending, everything costs 15.5% more because of the VAT. This disproportionately affects the poor because the costs of basic goods and services are relatively higher for them compared to their wealthy counterparts.

The recent improvement in the tax regime has helped, but even though Israel may be ahead of some of its European counterparts, it is critical for the relatively small country to vigorously reform and reduce taxation.

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By Aaron Katsman
IsraelNewsletter.com

As if investors needed more proof that the Israeli economy has left the realm of emerging markets, today’s announcement by the OECD to invite Israel to become a candidate for membership is just what the doctor ordered. It’s important to note that the OECD has never rejected a country for membership that has been invited for membership talks.

Israel has made it a priority over the last decade to gain membership to this important organization, and today’s invitation is another major step showcasing Israel as a global economic force. Clearly an emphasis towards more governmental transparency, enacting and enforcing strict laws fighting money laundering and enforcing intellectual property rights, as well as economic reforms put in place buy former finance minister Benjamin Netanyahu, have impressed the OECD.

Today happens to be the 40th anniversary of Jerusalem reunification. In the afternoon, there is a large parade downtown in celebration. Unfortunately it’s been pouring rain outside which almost never happens in Israel in mid-May. Everyone is wondering why we are experiencing this downpour. Former Bank of Israel head David Klein, in response to Israel’s OECD invitation, clearly decided to rain on today’s parade. “ It’s roughly like having a membership card to the golf club in Caesarea. It’s prestigious and it’s a club that’s good to belong to, it adds quite a bit to national pride, but it won’t change Israel’s economic future.”

Dr. Klein, go to the 19th hole, drink a beer and relax. The membership isn’t just symbolic. It should help Israel’s credit rating improve, thus allowing us to tap foreign debt markets at a much lower interest rate, enabling significant lowering of national debt. This savings in debt servicing, used to fund continued tax cuts, could help continue the economic boom Israel has been experiencing.

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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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By Aaron Katsman
IsraelNewsletter.com

I was recently on vacation, spending time both in Seattle and in New York, and I was asked to speak a bit on both the Israeli economy as well as interesting Israeli companies. Other than Teva Pharmaceuticals (TEVA), the company that is most well know is Given Imaging (GIVN). Everyone seemed to be aware of their “cool” PillCam technology. For those who don’t know, GIVN has revolutionized the gastrointestinal diagnosis industry with the PillCam video capsule, a disposable, miniature video camera contained in a capsule, which is ingested by the patient and allows for the non-invasive visualization of the GI tract. They have become the symbol of Israeli ingenuity.

For investors though, until recently, the stock was in a deep freeze. Though the company had this innovative technology, they had problems penetrating the market, and they disappointed investors with slower than expected growth. Over the last few quarters, however, the company has started firing on all cylinders, and the stock has reacted accordingly. Noted Israeli investor Shlomo Greenberg had an interesting take on the company’s newfound success in a recent Seekingalpha article. He spoke about the appointment of Israel Makov, former President and CEO of TEVA, as Chairman and the impressive Board of Directors that has been compiled. While this certainly plays a part in the company’s recent stock price surge, I think it’s actually executing the business plan that is the main driver. Recent news of Japan’s Ministry of Health, Labor and Wealth approving PillCam SB Capsule and equipment for sale and marketing, signing a global strategic agreement with Fujinon Corporation to collaborate on research and development, sourcing and non-exclusive distribution activities and a strong 23% increase in North American PillCam sales, and raising of revenue targets for the rest of ’07, are the main contributors. Ultimately it comes down to execution, not hype that excites investors. We have seen too many overly-hyped Israeli companies falter. It’s refreshing to find innovative companies that are also able to execute on the business side.

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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

Please see our disclaimer here: http://israelnewsletter.com/disclaimer/

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By Aaron Katsman
IsraelNewsletter.com

Jacada (JCDA), a global provider of unified service desktop and process optimization solutions that simplify and automate customer service processes, by bridging disconnected systems into a single, “intelligent” WorkSpace, has announced the completion of the most profitable quarter in company history. Total revenues increased 23.6% to $6.4 million from 2006 and Non-GAAP net income for the first quarter of 2007 was $752,000, or $0.04 per diluted share. While revenue was helped by legacy products, Gideon Hollander, CEO, commented, “We anticipate that an increasing proportion of revenue from our new products will lead our next phase of growth, as we drive market awareness for our innovative call center desktop solutions.” As opposed to the legacy products, the new products generate much more recurring revenue, thus allowing for continued and sustained growth. Most importantly, the company raised its revenue guidance for the rest of 2007, pointing to a growing backlog, and clearer visibility in the sales pipeline.

With a market cap under $75 million, and almost $36 million in cash, Jacada is still flying under Wall Street’s radar, but with a succession of newly signed contracts with the likes of Avaya, ING Canada, the stock seems well positioned to move. We have seen this scenario play out with numerous other small Israeli companies that keep quietly growing their business, turning profitable, gaining some PR traction and then flying. Just look at Silicom (SILC), Pointer Telocation (PNTR) to name a few. With a small float to boot, keep an eye on JCDA.

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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

Please read our disclaimer here: http://israelnewsletter.com/disclaimer/

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