¹ Edrey, J.M., “The Definition of Employee for Income Tax Purposes” (1982) 17 Is.L.R. 290–333CrossRefGoogle Scholar.

² Ibid., at 291.

³ On the distinction between discussion of the lex lata and proposals for the lex ferenda, see, for example, Barak, infra n. 5, where he justifies functional interpretation of certain terms, while in another article (infra n. 7) he lays down guidelines for codification. See further the discussion in the text at nn. 5–18.

⁴ For a survey in English, see: David, R. and Brierly, J.E.C., Major Legal Systems in the World Today (London, 2nd ed., 1978)Google Scholar.

⁵ Barak, A., “The Independence of the New Civil Codification: Risks and Prospects” (1977) 7 Mish patim 15Google Scholar.

⁶ Ibid., at 29.

⁷ Barak, A., “The Codification of the Civil Law in Israel” (1973) 3 Iyunei Mishpat 6–7Google Scholar.

⁸ See Lobingier, , “Codification”, Encyclopaedia of the Social Sciences (1930) vol. 2, pp. 606, 609, 612Google Scholar; Bayitch, , “Codification in Modern Times” in Civil Law in the Modern World (1965) 161, 162 ff.Google Scholar; Stone, , “A Primer on Codification” (1955) 29 Tul. L. R. 303Google Scholar. Prof. Sereni has defined a code as follows: “It is in fact a systematic of coordinated legal precepts covering a substantial body of legal relations and formulated in general terms wherein a solution may be found to each and every legal problem arising in connection with any of the subject matters regulated by it.” Sereni, , “The Code and the Case Law”, in The Code Napoleon and the Common-Law World (Schwarts, (ed.), 1956) 55, 58Google Scholar.

⁹ See Schlesinger, , Comparative Law (2nd ed., 1959) 177–178Google Scholar.

¹⁰ See Tedeschi, G., “On the Technique of Future Israel Legislation” in Studies in Israel Law (Jerusalem, 1960) 69 at 75Google Scholar: “In continental Europe codification usually comes as an effort to break with the past, an effort to rationalize the law, and not merely as a step to consolidate the achievements of the past”.

¹¹ Barak, op. cit., supra n. 7 at 9; see further discussion, ibid., at 9–13.

¹² Ibid., at 12.

¹³ Ibid., at 14.

¹⁴ Ibid., at 16.

¹⁵ The author further explains in n. 22 on p. 9: “Just as the legislator should not use different terms to describe the same phenomenon, so for example, according to the Movable Property Law (sec. 15), (25 L.S.I. 175) the term “movable property” (Hebrew: metaltelin) means “corporal property other than immovable property”, whereas in the Sale Law (22 L.S.I. 107) the term nekhes nad is used. Are metaltelin and nekhes nad the same? See Weisman, J., “Property Which May be Pledged” (1971) 3 Mishpatim 494, 497Google Scholar.

¹⁶ On Barak's approach as a judge, see Nirosta v. State of Israel (1983) 12 P.D.E. 107, 110–111.

¹⁷ Feller, S.Z., “For the Sake of Legislative Fineness” (1981) 11 Mishpatim 182Google Scholar.

¹⁸ Feller, S.Z. and Harnon, E., “The Draft Law to Amend the Evidence Ordinance (No. 6), 5727–1967” (1967) 24 HaPraklit 94, esp. 105Google Scholar.

¹⁹ As an illustration of this, see the bill Chief Rabbinate (Amendment ) Law 5743–1983, which was designed to postpone the election date for purely political reasons.

²⁰ Carbonier, J., Droit Civil (Paris, Presses Universitaires de France, 11th ed., 1977)Google Scholar.

²¹ It should be remembered that it is extremely difficult to define legal terminology. On the difficulties of defining the term “employee” see our previous article, supra n. 1 and n. 24 below.

²² For example, the definition of property in the Civil Wrongs Ordinance (2 L.S.I. [N.V.] 5) is narrower than in the Income Tax Ordinance, sec. 88 (1 L.S.I. [N.V.] 145), while the Tenants' Protection Law (Consolidated Version), 5732–1972 (25 L.S.I. 204) defines the term specifically for the purposes of that statute: “property means a dwelling or business premises”.

²³ Thus, for example, sec. 1 of the Contracts (General Part) Law, 5733–1973 (27 L.S.I. 117) states what is a contract. Sec. 61 states that the statute's provisions shall apply, mutatis mutandis, where appropriate to legal transactions which are not contracts and to obligations that are not derived from contract. This structure gave rise to an interesting discussion on the meaning of sec. 19 of the Companies Ordinance—which is based on Common Law—and the application of the Israel Law of Contract—which has a Continental orientation—to the legal relations between shareholders themselves and between them and the company. See Procaccia, G., “The Application of the Contracts (General Part) Law to Memorandum and Articles of Association of a Company” (1977) 5 Iyunei Mishpat 491Google Scholar; Cohen, Z., The Legal Nature of a Company's Memorandum and Regulations, dissertation submitted for the degree of Doctor of Philosophy (Tel-Aviv, 1969)Google Scholar and Procaccia, U., “Winding-up at the Suit of Minority Shareholders” (1977) 8 Mishpatim 13, esp. 16–42Google Scholar.

²⁴ To avoid digressing from the subject of this article we shall assume that the authoritative definition of the term “employee” is that applying in labour law and that this definition is clear and authoritative. See the summary of the caselaw in our article, supra n. 1.

²⁵ The Israeli legislator in fact took such approach in the Civil Wrongs Ordinance (New Version) where a special definition of the term “employee” was given for the purposes of the Ordinance only, using a functional definition suitable to the rationale of vicarious liability. Sec. 2 gives the following definition: “‘employer’ means a person who, in relation to another, has complete control of the way in which such other performs his work for such person and is not himself subject to any similar authority in respect of the same work, and ‘employee’ means any person whose work is so controlled.” For a discussion of the subject see Barak, A., Vicarious Liability in the Law of Torts (Jerusalem, 1965)Google Scholar.

²⁶ See supra n. 24.

²⁷ See supra n. 25.

²⁸ Edrey, op. cit., supra n. 1 at 317 at n. 128.

²⁹ Ibid., at 305 at n. 60 and esp. 318–319.

³⁰ Barak, supra nn. 5 and 7.

³¹ As Tedeschi defines it: “… the meaning of words, the definition of concepts, and all those fundamental principles which are implicit in every system.” See Tedeschi, G., Studies in Israel Law (Jerusalem, 1960) 79–80Google Scholar.

³² See Barak, supra n. 7 at 66.

³³ See, inter alia, Zeltner, , Contract Law in the State of Israel (1974) at 14–17Google Scholar.

See also Barak, supra n. 5 at 16 and the references given there. It is true that since those comments were written the Foundations of Law 5740–1980 (34 L.S.I. 181) has been passed, but we assume that the above conclusion has not been materially altered thereby.

³⁴ Supra n. 31.

³⁵ Landau, M., “The Land Law 5729–1969 — in General and Particularly Servitudes under the Land Law” (1972) 3 Iyunei Mishpat 86, 88Google Scholar.

³⁶ As an illustration thereof, see Procaccia, U., “Comment on the Bill of Sales (Apartments) (Protection of Investments of Purchasers of Apartments), 5733–1973” (1975) 5 Mishpatim 452, esp. 458–462Google Scholar, which points out the unclear situation left by sec. 127 of the Land Law, 5729–1969 (23 L.S.I. 283) after its first amendment; and for tax law, see Yoran, A., “The Limitations on Business Expenses in the Transitionary Period” (1973) 4 Mishpatim 673Google Scholar.

³⁷ See supra nn. 17 and 18.

³⁸ See, for example, Tiley, J., Revenue Law (London, 3rd ed., 1981)Google Scholar paras. 1:05–1:08. Not everyone agree with this approach, of course. For an interesting survey see Groves, , Tax Philosophers (Michigan, 1973)Google Scholar.

³⁹ Edrey, J., “A Comprehensive Tax Base in Israel” (1982) 12 Mishpatim 431–471Google Scholar.

⁴⁰ See Part II, infra.

⁴¹ Thus the term “halva'ah”, for example, which appears in tax statutes must be interpreted, in the absence of a specific definition, according to its meaning in civil law. See infra nn. 51 and 52.

⁴² Thus, for example, in the Defence Loan Law, 5733–1973 (27 L.S.I. 87), a system of inheritance was laid down that is fundamentally different to that of the Succession Law, 5725–1965 (19 L.S.I. 58). See text at infra nn. 59–61.

⁴³ See supra n. 24.

⁴⁴ As we have indicated, there are three possible alternatives, see above part I.

⁴⁵ See, e.g., Defence Loan (Approved Undertakings) Law, 5734–1974 (28 L.S.I. 64), Loan (Cost of Living Allowance) Law, 5735–1975 (29 L.S.I. 65), and Defence Loan Law 5717–1956 (11 L.S.I. 5); and Defence Loan Law 5733–1973, sec. 14. But see infra n. 48.

⁴⁶ Sec. 9(13) of the Income Tax Ordinance (29 L.S.I. 215) exempts “linkage differentials, not being income under sec. 2(1) on preferred loans”; the term “preferred loans” according to sec. 1 of the Ordinance means “loans, or deposits under a savings scheme, the interest on which is wholly or in part exempt from tax under any law, unless otherwise provided in that law”.

⁴⁷ For example, “approved loan” (halva'ah) within the meaning of the Encouragement of Capital Investment Law, 5719–1959 (13 L.S.I. 258), the interest on which is liable to a limited tax rate (secs. 24 and 46 of the said Law) is within the definition of “preferred loan” (milveh) and thus the linkage differentials are exempt from tax under sec. 9(13) of the Ordinance.

⁴⁸ See the definition in the Interest Law, 5717–1957, sec. 1 (11 L.S.I. 46): “loan” (milveh) means any credit transaction, including the discounting of a bill and the transfer in any other manner of a debt under a bill”. See also: Income Tax (Tax Exemption on Interest and Linkage Differentials) Order, 5739–1979, and Income Tax (Tax Exemption on Interest) Order, 5738–1978. Both Orders deal with the same subject-matter; the first uses milveh and the second halva'ah.

⁴⁹ Tamir v. Assessing Officer (1981) 11 P.D.E. 88 and the references therein.

⁵⁰ Income Tax Ordinance (Amendment No. 32) Law, 5738–1978 (32 L.S.I. 277). By preferring the word “debt” to loan (milveh) the legislator took a step in the direction of uniformity. See sec. 3(b) of the Ordinance and the definition of the term halva'ah in sec. 19(b) of the Income Tax (Taxation in an Inflationary Period) Law, 5742–1982, infra nn. 51–53. It is doubtful whether this step is satisfactory. On the nature of the term debt, which is very wide, see e.g., Levontin, A.V., “Debt and Contract in the Common Law” (1966) 1 Is.L.R. 69Google Scholar. See also Tedeschi, G., “The Nature of a Bank Deposit”, (July 1983) 86 Ha-Riva'on LeBanka'ut 14–74Google Scholar.

⁵¹ S.H. 1061, p. 234.

⁵² In Israeli case-law see, for example, Katz v. State of Israel (1976) 30 (iii) P.D. 673. See also Michie, Paget, Banks and Banking (2nd ed., 1950) vol. 5A, p. 22Google Scholar; Chitty on Contracts (1961) vol. 2, p. 941Google Scholar. A dissenting view is presented by Oliel, R. Ben, The Judicial Nature of Bank-Depositor Relationship, Thesis for the Degree of Doctor of Law (Hebrew Univ., Jerusalem, 1977)Google Scholar and by G. Tedeschi, “The Nature of a Bank Deposit”, supra n. 50. The first author contends that there is no loan relationship between bank and client. According to Tedeschi, however, there is no practical significance to the classification of a contract as loan or deposit, providing it is clear, whole and valid in all its conditions, ibid., at 18. The dispute between them centres on the nature of the client's right against the bank. Ben Oliel claims that the client has a proprietory right, while Tedeschi maintains that the client has only a personal right against the bank, i.e., sounding in debt. It is doubtful whether the legislator was aware of this debate.

⁵³ Thus the legal advisor of the Income Tax Commission was obliged to announce in circular I.T./12/83 of Aug. 5, 1983 that the Treasury had no intention, under sec. 19, of taxing compulsory import deposits which are not index-linked and do not bear interest.

⁵⁴ It should be remembered that under Israeli Tax Law financing expenses (interest and index linked differentials) are deductable only if accrued due to business activity, see sees. 17, 17(1) and 32 of the Ordinance.

⁵⁵ It should be noted that this problem emerged only after the Tax Reform of 1975. Since that reform, the tax consequences of interest and linkage differentials are the same.

⁵⁶ Sec. 17 of the Ordinance provides: “For the purpose of ascertaining the chargeable income of any person there shall be deducted all outgoings and expenses wholly and exclusively incurred during the tax year by such person in the production of the income,…” Sec. 32 of the Ordinance provides: “For the purpose of ascertaining the chargeable income of any person, deduction shall not be allowed of … (2) outgoings or expenses which were not incurred wholly and exclusively for the purposes of creating the income …” Sec. 18(c) provides: “Where the income of any person includes income for which a special rate of tax has been fixed or which is exempt from tax (such last mentioned income being hereinafter referred to as “preferred income”), the expenses incurred by that person for the purpose of acquiring the preferred income shall be allowed for deduction under sec. 17 only against that income.” The section goes on to provide a formula for apportioning the expenses when it is not possible to distinguish between the allowed and forbidden parts thereof.

⁵⁷ See Rafael, A.–Efrati, D., Income Tax Law (Tel Aviv, Shocken, 1980) 330–337Google Scholar.

⁵⁸ Engel v. Assessing Officer, Jerusalem (1982) 36 (iii) P.D. 829.

⁵⁹ Defence Loan Law, 5733–1973, sec. 7.

⁶⁰ Succession Law, 5725–1965, secs. 2, 10–13, 18.

⁶¹ See Nahmias, H., “Early Repayment of Defence Loan Certificate whose Owner Died” (1980) 10 Mishpatim 165Google Scholar.

⁶² Hadari, Y., “The Price and the Taxable Day for V.A.T. Purposes” (1982) 8 Iyunei Mishpat 512 at 516–518Google Scholar.

⁶³ See, inter alia, sec. 10 of the Value Added Tax Law, 5734–1974 (30 L.S.I. 46); Land Appreciation Tax Law, 5723–1963, sec. 1 (17 L.S.I. 193)—definition of the term “value” of a particular right; sec. 130 of the Customs Ordinance (New Version), 5717–1957 (1 L.S.I. [N.V.] 51); secs. 85(c) and 88 of the Income Tax Ordinance—definition of the term “consideration”.

⁶⁴ See, for example, Potchebutzky, J., “The Rights of a Participator in State Taxes” (1979) 9 Mishpatim 296Google Scholar, which notes the inconsistent use of a large number of common legal terms.

⁶⁵ In terms of income tax, the definition of the term “income” and the presentation of the main characteristics of the term; see supra n. 39.

⁶⁶ Under the taxation by source doctrine, division of income by source is of course of the greatest importance, as shown in detail in our previous article. But even under the “comprehensive tax base” system it is in our opinion important to divide income by the classic sources, namely income from personal exertions —“earned income”—and income from capital. And see concluding note below, part IV, and part III text at n. 225.

⁶⁷ In other words, when the income is taxable by a particular State.

⁶⁸ How income is measured, namely assessing the value of the income in question and the ways of quantifying notional income such as that in sec. 3 of the Ordinance, and calculating the profit on trading stock.

⁶⁹ What are the exemptions, deductions and set-offs allowed against the gross income.

⁷⁰ Mainly on a cash or accrued basis.

⁷¹ Tax brackets, tax credits, tax rebates and calculation of the tax; by individual, family, partnership and company.

⁷² A full version of this model will be presented in our forthcoming book, The Principles of Personal Income Tax.

⁷³ As can be seen from the limited details given in nn. 65–71 above and nn. 103 and 104 below.

⁷⁴ As long as purely accounting questions are involved, such as how income and expenditure should be recorded, etc., this stage is only of technical importance. When the question of who is entitled to make returns, and under which system—on a cash or accrual basis—and what are the consequences of tax deferral is discussed, then it becomes of substantive importance.

⁷⁵ See, inter alia, Amir, G., Income Tax—Offences and Punishments, (Tel-Aviv, 2nd ed., 1971) esp. 128–132Google Scholar.

⁷⁶ In Moshiyov v. Pazgaz (1972) 26 (i) P.D. 360, the Supreme Court expressed the view that it was unthinkable that an employee should be required to pay sums of money in order to acquire the right to work for an employer.

⁷⁷ On the tests for economic risk see our previous article (op. cit., supra n. 1 at 322) and the references therein.

⁷⁸ See, inter alia, Miller, P., “Capital Gains Taxation of the Fruits of Personal Effort Before and Under the 1954 Code” (1954) 64 Yale L.J. 1–88CrossRefGoogle Scholar.

⁷⁹ Bar-Niv, Z., “Labour Law” in Zadok, H. and Ben-Naphtali, A. (eds.) Law and Administration (Tel-Aviv, 1971) 488Google Scholar.

⁸⁰ Ibid.

⁸¹ See supra n. 75.

⁸² See J. Edrey, op. cit., supra n. 1 at 304 and the references therein.

⁸³ Such as a lorry owner who conducts a private business distributing merchandise of one producer. See our previous article (op. cit, supra n. 1 at 302–3 and especially the Wolf case, nn. 41, 45).

⁸⁴ E.g., Dr. Peled v. Asessing Officer Tel-Aviv 5 (1975) 7 P.D.E. 108.

⁸⁵ The Minister of Finance makes wide use of his powers under sec. 164 of the Ordinance to make Income Tax Orders in order to declare certain income as taxable at source. See especially Tax Law Digest 7.11.

⁸⁶ Income Tax (Advanced Tax Payments according to Turnover) Regulations, 5742–1982.

⁸⁷ The Wolf Committee of the Histadrut found that because of differences in the methods of collection in use in 1978, the effective tax burden on the self-employed was 18% lower than that on employees. See Davar, 18.3.78.

⁸⁸ On the attempts of the legislator and the tax authorities, see supra nn. 85 and 86.

⁸⁹ See supra n. 77.

⁹⁰ Since the maximum marginal tax rate is 66%. The above calculation does not include compulsory payments and other contributions which raise the effective total tax rate.

⁹¹ We should point out that the existence of this dependence is a matter of dispute. See, inter alia, Edrey, op. cit., supra n. 1 at 299–301 and reference to n. 28. It has been argued that this dependence is mutual, and even that the employer is sometimes more dependent on the employee than vice-versa. We shall not enter upon a discussion of this point, save to note that from the Israeli legislator's point of view this dependence does exist, as demonstrated by the long list of statutes designed to protect the employee. As Bar-Niv puts it: “In relations between employee and employer the latter has the stronger position, and the power and opportunity to exploit the employee”, op. cit., supra n. 79 at 498–499.

⁹² Ibid.

⁹³ See sec. 12 of the Severance Pay Law, 5723–1963 (17 L.S.I. 161). It is true that if the self-employed person's client breaks his contract with the taxpayer, he is liable in damages—see Article Three, secs. 10–16 of the Contracts (Remedies for Breach of Contract), Law, 5731–1970 (25 L.S.I. 11)—but clearly the calculation of damages and the grounds for the claim will be different from those of severance pay: see further below.

⁹⁴ Hours of Work and Rest Law, 5711–1951 (5 L.S.I. 125).

⁹⁵ The Annual Leave Law, 5711–1952 (5 L.S.I. 155), as interpreted by the Labour Court, in fact obliges the employee to leave. See, inter alia, Bar-Niv, op. cit., supra n. 79 and see below.

⁹⁶ Employment Service Law, 5719–1959 (13 L.S.I. 29).

⁹⁷ Wage Protection Law, 5718–1958, secs. 2 and 5 (12 L.S.I. 100); Hour s of Works and Rest Law, 5711–1951, secs. 6, 7, 9, 10 and 16.

⁹⁸ Wage Protection Law, 5718–1958, sec. 16.

⁹⁹ See Chap. F 3 of the National Insurance Law (Consolidated Version), 5728–1968 (22 L.S.I. 114), which deals with the compulsory insurance of employees' rights in case of bankruptcy or winding-up of their employer.

¹⁰⁰ “Employees” in the public sector benefit from statutory arrangements establishing their right to a pension. See, inter alia, the State Service (Benefits) Law (Consolidated Version), 5730–1970 (24 L.S.I. 57); Defence Army of Israel (Permanent Service (Benefits) Law, 5714–1954 (8 L.S.I. 149); Holders of Public Office (Benefits) Law, 5729–1969 (23 L.S.I. 107) and the decisions under this statute as to Members of the Knesset, the State Comptroller, the Director of the Bank of Israel and his deputy, judges, the President of the State and Ministers.

¹⁰¹ For the influence of our analysis on Stage 3 of our model see infra text at nn. 232–238.

¹⁰² On the different stages, see supra text at nn. 65 and 73.

¹⁰³ Quantification of the gross salary, i.e., determining the receipts to be included in the tax base and their quantification: see supra nn. 65–73 and infra text at nn. 239 ff.

¹⁰⁴ That is to say, determination of the deductions, exemptions and set-offs permitted. And see supra nn. 65–73.

¹⁰⁵ See e.g., Simmons, , Personal Income Taxation (Chicago, 1938) chap. V, pp. 110–124Google Scholar, discussing income in kind, where the author does not distinguish at all between employee and self-employed as the recipient of such income. On the taxability of a farmer's notional income see e.g., Assessment Officer v. Sheffer and Schmerling (1963) 17 P.D. 2713; for a householder see Beth Ararat Ltd. v. Assessing Officer for Larger Undertakings (1961) 16 P.D. 991.

¹⁰⁶ As stated, the most suitable tax system is that based on the principles of the comprehensive tax base, which in our view reject the use of tax incentives. See J. Edrey, op. cit., supra n. 39.

¹⁰⁷ See, inter alia, Edrey, J., “Deductability of Employee's Expenses in the Law of Income Tax” (1977) 8 Mishpatim 195 at 213Google Scholar.

¹⁰⁸ Thus in the United States, sec. 165 of the I.R.C. applies to all taxpayers: Friedman v. Deleney 49–1 U.S.T.C. 9106. This was apparently the intention of the English legislator, although a strange system still exists there—explained as an error—whereby only a person with income from employment and not a person holding an office can set off losses against various sources of income in the same or later two years. See the discussion in Whiteman and Wheatcroft, , On Income Tax (London, 2nd ed., 1977) 530–630Google Scholar.

¹⁰⁹ This is a recognized expense: see Friedman v. Assessing Officer (1962) 29 P.M. 235.

¹¹⁰ As set out in sec. 28 of the Ordinance which applies, according to general interpretation, only to the self-employed. See Witkon, and Ne'eman, , Tax Law (Tel Aviv, 4th ed., 1969) 182Google Scholar.

¹¹¹ See sec. 3(a) of the Ordinance.

¹¹² If it were not so, i.e., if he incurred expenditure knowing that it would not produce income, it would not be recognized as deductible. See the rule as expressed in Assessing Officer for Large Undertakings v. Israel Film Studios Ltd. (1975) 7 P.D.E. 95. It should be remembered that we are not dealing in this section with the deduction of private expenses in the course of business.

¹¹³ See the discussion in the text at n. 115 et seq.

¹¹⁴ See inter alia, secs. 17(4) and 28, which deal only with self-employed; regs. 2 and 4 of the Income Tax Regulations (Deduction of Certain Expenses) 5732–1972, hereinafter “The 1972 Regulations”, and reg. 5 of the Income Tax Regulations (Deduction of Motor-Vehicle Expenses) 5735–1975, hereinafter “The Vehicle Regulations”.

¹¹⁵ See supra n. 114.

¹¹⁶ J. Edrey, supra n. 107. See Rafael-Efrati, op. cit., supra n. 57 at 267–268, adopting the view expressed in our article above.

¹¹⁷ A principle which has been recognized by Israeli case-law: Assessing Officer Haifa v. Dr. Moshe Later (1966) 20 (ii) P.D. 231.

¹¹⁸ “The 1972 Regulations”, supra n. 114.

¹¹⁹ The Israel Film Studios case, supra n. 112.

¹²⁰ It is true that the increase in this income is chargeable to tax, but nowhere near the proportion proposed.

¹²¹ See sec. 17 and the interpretation given it in Biegelman v. Assessing Officer (1972) 5 P.D.E. 75. See also J. Edrey, op. cit, supra n. 107 at 201–204.

¹²² See the text at supra n. 105.

¹²³ On the nature of these expenses see, for example, Witkon and Ne'eman supra n. 110 at 151–153.

¹²⁴ E.g., a payment made only to protect current income as apposed to one that obtains an advantage for the enduring benefit. On the nature of these expenses see, for example, Witkon and Ne'eman, 137–151.

¹²⁵ See, for example, Rina Cinema v. Assessing Officer Tel-Aviv 3, (1974) 6 P.D.E. 75.

¹²⁶ Essentially to protect the current level of professional knowledge and not to obtain an advantage for the enduring benefit.

¹²⁷ Reg. 4 of the 1972 Regulations, which deals, inter alia, with expenditure on journeys abroad, provides that the expenses detailed in the regulations that were incurred by an employee in excess of the sum paid to him by his employer will not be deductible. The Income Tax Authorities interpret these regulations as applying also to expenditure on supplementary training abroad: see circular MK 30/13 of 18.12.74.

¹²⁸ Assessing Officer, Haifa v. Dr. M. Lazer, supra n. 117.

¹²⁹ See sec. 32(1) of the Ordinance.

¹³⁰ See Edrey, op. cit., supra n. 107.

¹³¹ One example of incidental expenses is illustrated by the Friedman case, supra n. 109, where it was held that a businessman who had caused loss and damage in a road accident while on a business journey can deduct the damages paid by him as an expense. Another example is found in Express Tours v. Assessing Office Tel-Aviv 4, (1972) 5 P.D.E. 27, where the rule was laid down that money stolen from the business in the normal course of business operations is deductible as an incidental expense. Is it conceivable that if it was an employee who had had to pay damages for loss caused by him or a cashier whose cash-box had been stolen, they could not deduct those sums simply because of their different status? It seems to us that the answer must be in the negative: in both cases the expense will be deductible whether the employer indemnified the employee or not.

¹³² In the case of such expenses also it is not conceivable that a distinction be made between a self-employed and employed taxpaper who pays legal fees for services to prevent the withdrawal of a professional licence. The fee will be deductible by the employee as it is by the self-employed taxpayer, and whether the employee refunded his expenditure or not. For a survey of the law see, e.g., Raphael, A., “The Principle of Enduring Capital” (1979) 33 HaPraklit 299Google Scholar.

¹³³ Thus, for example, an employee can deduct his expenses in preparing returns and in all stages of assessment and appeal proceedings whether his employer took part in them or not. See sec. 17(11) of the Ordinance, which places special limits on self-employed taxpayers only who did not keep books.

¹³⁴ As laid down in reg. 4 of the 1972 Regulations, supra n. 114.

¹³⁵ See e.g., Biegelman v. Assessing Officer, supra n. 121, where the Court refused to allow an employee to deduct his private motor vehicle expenses after his employer did not contribute to the costs of keeping a vehicle.

¹³⁶ Cohen v. Assessing Officer Tel-Aviv 1, 5 (1974) 6 P.D.E. 66. For a proposal for reconciling this case with the Biegelman case and a wider discussion of the problem, see J. Edrey, supra n. 107 at 201–204.

¹³⁷ The right to severance pay depends on several alternative requirements. See the Severance Pay Law, supra n. 93 and the Severance Pay Regulations (Calculation of Compensation and Resignation deemed as Dismissal) 5724–1964.

¹³⁸ A similar scheme giving rise to a double exemption exists in relation to a death gratuity, see sec. 9(7A)(b) of the Ordinance.

¹³⁹ In Hefetz v. Assessing Officer (1974) 6 P.D.E. 2 at 7 the Court states: “In our view there are no grounds for a fine distinction between severance pay and damages, since both derive from breach of contract by the employer. The legislator cannot have intended to make the former taxable and the latter exempt. Such discrimination appears to me illogical. Also the word “retiring” is very wide and includes any instance of leaving employment, whether at the date fixed by contract or earlier, and whether at the employee's initiative or the employer's in fact.”

¹⁴⁰ In the words of the Court: “From the limitation placed on the exemption by the legislator we are bound to construe his intention as being that any sum exceeding the amount of the exemption is to be deemed taxable income” (ibid., at 7).

¹⁴¹ See Yoran, A. and Kariv, G., “The Tax Consequences of Retirement Payments” (1973) 3 Iyunei Mishpat 190Google Scholar; Lipsky-Halifi, J. and Eilat, C., “Gratuities on Retirement or Death”, 8 Tax Quarterly 122Google Scholar; Lapidoth, A., “On the Formulation and Interpretation of Tax Statutes” 9 Tax Quarterly 177 at 192–194Google Scholar.

¹⁴² See, for example, Baumel v. Assessing Officer (1974) 28 (i) P.D. 650 at 655. Witkon J. says, in delivering the judgment of the Court: “An exemption is not the same as non-liability. The legislator may establish non-liability impliedly or expressly. When he defines the obligation, anything outside the field of that obligation is automatically not liable … Why then should we depart from the rule and impose on the taxpayer the obligation of proving that he is not liable to tax, instead of imposing on the assessing officer the duty of proving the elements of liability?”

¹⁴³ Sec. 2(9) establishes a special source of income for the sale of a copyright or patent by the author or inventor if the invention was made or the work produced other than in the course of the inventor's or author's ordinary occupation. Yet, the maximum tax rate applies to such income is limited to 40%. See sec. 125 of the Ordinance.

¹⁴⁴ See, for example, sec. 3(b) (3) which provides, inter alia, that a gratuity of a capital nature bears tax at the rate of 50%; see also sec. 3(c), which provides that redemption of stock dividends are liable to tax (albeit to a limited extent).

¹⁴⁵ The section, as amended by Amendment No. 25, to the Ordinance provides: “… any amount which he withdraws from a compensation benefit fund before his retirement from employment with the last employer and which derives from retirement benefits as referred to in sub-item (a) and the profits therefrom, shall be liable to tax”.

¹⁴⁶ Thus sec. 9(17), for example, which speaks of a tax exemption on monies received by an employee, derived from an employee's payments to a benefit (pension) fund. The definition of “(pension) benefit” in the Income Tax Regulations (Rules for Authorizing and Managing Benefit Funds) 5724–1964 is: “a capital sum paid by a pension fund etc.” There is no doubt that the regulation is referring not to a sum of a capital nature but to a lump sum. For a discussion of benefit funds see below, Part III, B sec. 7b. Professor Lapidoth reaches the same conclusion after analysing the legislative history of the section: see his article, op.cit., supra n. 141 at 194.

¹⁴⁷ In the Hefetz case, supra n. 139, and later in Assessing Officer Haifa v. Perma-Sharp (1974) 6 P.D.E. 361.

¹⁴⁸ Supra n. 141.

¹⁴⁹ It should be noted that in the Perma-Sharp case (supra n. 147), the court was not convinced by the argument that the sum called by employer and employee “compensation for damage to the employee's reputation and for the suffering caused to him” was in fact just that. In the court's opinion, this was just another name for higher severance pay given by the employer to the employee. Thus it may be concluded that the court did not express an opinion on the possibility that the employee did in fact receive such damages, and if he did, what the law was for the purposes of tax.

¹⁵⁰ For a discussion of the meaning of the term in Israeli legislation, see, inter alia, Stein v. Assessing Officer Tel-Aviv 1 (1973) 27 (i) P.D. 183; Katzir Ltd. v. Assessing Officer Tel-Aviv 1 (1971) 25 (i) P.D. 762; Soler v. Assessing Officer Haifa (1967) 21 (i) P.D. 21; and the summary of the case-law in Gemer v. Assessing Officer Kfar Saba (1976) 8 P.D.E. 409.

¹⁵¹ See supra n. 150.

¹⁵² In practice such a clarification will give rise to problems in calculating the real and inflationary capital gain, as is the practice in Israeli law. Since the employee does not invest in the contract of employment, (see supra n. 76), the cost of that contract is nil and its revaluation according to the rate of inflation is impossible. The legislator will therefore be forced to apply to this case the special method of calculation that was created for “goodwill not paid for”: see sec. 88 of the Ordinance. The question whether the scheme for a type of goodwill is justified or not must remain unanswered here.

¹⁵³ For example, the right of a shareholder to request dissolution of the company: see Avrech v. Assessing Officer (1974) 6 P.D.E. 241.

¹⁵⁴ Thus the Supreme Court in Avrech (supra n. 153) held that waiver of a right to dissolve the company constitutes the sale of a capital asset and is subject to capital gains tax.

¹⁵⁵ As held by the District Court in Marveh v. Assessing Officer (1971) 3 P.D.E. 21, and see also the decisions of the Supreme Court: Assessing Officer for Large Undertaking (Pashmag) v. Amiel Metal Industries Ltd. (1968) 22 (i) P.D. 488; Dobrovsky v. Assessing Officer Haifa (1964) 18 (iii) P.D. 587; Yadlowitz v. Inheritance Tax Director (1963) 17 P.D. 2297.

¹⁵⁶ This approach is indirectly supported by the Supreme Court's ruling in V.S.T. v. Assessing Officer Netanya, where it was held that severance pay and death gratuity are deductible by the employer against his income, inter alia, because they form a part of the consideration paid to an employee for his services to the employer. See the article by Yoran and Kariv, op. cit., supra n. 141 esp. at 191–192 and the references therein. It is possible to interpret in the same light the fact that the Severance Pay Law, supra n. 93, does not give the Labour Court power to reduce severance pay, which it does have with regard to damages for withholding wages. Moreover, sec. 12(c) of the Law empowers the Minister of Finance by regulation to increase the rate of severance pay, but not to reduce it; but see also sec. 16 which allows dismissal without severance pay or with reduced severance pay on the strength of a collective agreement. From all this it may be seen that the legislator regarded severance pay as a vested right, of which the employee should be deprived only in rare cases. We may add the statistical fact that in the majority of cases, where the employer sets aside for benefit fund 8 1/3% of the employee's salary from his own pocket, the sums accumulate to the benefit of the employee, who receives that when the employment link is broken whether he is entitled to it under the statute or not.

¹⁵⁷ which is 1/12th, i.e., the severance pay rate for each year of employment. Needless to say, when the employer transfers these sums to a benefit fund and they accumulate to the employee's benefit (see supra n. 156) there is no difficulty in charging the employee tax on them.

¹⁵⁸ It should of course be remembered that the employee has the right—under the existing law—to averaging, bu t over no more than six years: sec. 8(c)(3) of the Ordinance. At a time of hyper-inflation, this section has no reasonable meaning unless a special technique of linkage will be included.

¹⁵⁹ Subject to supra n. 157.

¹⁶⁰ A difficulty considered by the District Court (Asher J.) in Marveh v. Assessing Officer, supra n. 155.

¹⁶¹ Although it must be remembered that the Ordinance in some, admittedly few, cases allows a taxpayer who normally submits returns on the cash system to be charged unde r the accrual basis. See, inter alia, secs. 8, 8A, 8C.

¹⁶² Supra n. 158.

¹⁶³ And not in the last year because it is possible that he worked for only a part thereof or not at all and his marginal tax rate in that year will be lower than the multiannual average.

¹⁶⁴ The Severance Pay Law, supra n. 93, provides that the level of severance pay is to be determined by multiplying the last monthly salary by the number of years employment. Just as the last salary serves as a measure for determining the level of severance pay, the last marginal tax rate on the last salary may serve as a suitable measure.

¹⁶⁵ Barki v. Assessing Officer Tel-Aviv (1974) 6 P.D.E. 64. In England, see, e.g., TA. 1970, sec. 187. For a discussion of this provision see Tiley, op. cit., supra n. 38 at para. 10:40.

¹⁶⁶ See below, text at n. 171.

¹⁶⁷ See, for example, a functional definition of this term in sec. 9A of the Ordinance.

¹⁶⁸ Sec. 3(f) provides: “Where the occupation of a person whose income is determined by assessment on a cash basis ceased in a particular tax year, all the amounts which, owing to the determination of the income on a cash basis, were not charged with tax in the hands of that person before the cessation shall be regarded as income, etc.” The section was amended in reaction to the British case of Bennett v. Ogston (1930) 15 T.C. 374.

¹⁶⁹ It must of course be borne in mind that if the employee receives both a retirement gratuity and a pension, the level of exemption on the latter is reduced as stated in secs. 9(7A) (d) and (g) of the Ordinance. On the subject of the exemption on pensions, see text at nn. 173–192. On the subject of benefit fund, see text at nn. 193–221.

¹⁷⁰ In England there is a special exemption for retirement payments received by employees: TA secs. 187–188. See also R.C.V. Brander and Cruickshank (1971) 46 T.C. 574 (H.L.). In the United States there is no such exemption but there is a series of tax incentives for many “qualified plans”, the most interesting of which for our purposes is that known as ERISA. On this plan see Andrews, W.D., Basic Federal Income Taxation (Boston, 1979) 815–836Google Scholar.

¹⁷¹ On this approach see, inter alia, Report of the Royal Commission on Taxation (The Carter Commission Report) Canada (Ottawa, Queen's printer, 1966). See also, Aaron, H. “What is Comprehensive Tax Base Anyway?” (1969) 22 National Tax Journal 543Google Scholar.

¹⁷² See, inter alia, Schreiber, C. and Yoran, A., “Child Care Expenses: A Proposal for a More Equitable and Efficient Tax Treatment” 1976) 54 Taxes 345–353Google Scholar.

¹⁷³ The term used by the Ordinance is kitzva (Pension), which refers both to a pension received by a retiring employee and to other sums paid monthly such as payments from a mutual insurance fund: see Mai-Zahav v. Assessing Officer Tel-Aviv 2, (1970) 2 P.D.E. 349. Likewise pensions from the National Insurance Institute: Corngold v. Assessing Officer Jerusalem (1968) 1 P.D.E. 429; and pensions deriving from the German reparations agreements: David Asher v. Assessing Officer Haifa (1969) 23 (i) P.D. 432.

¹⁷⁴ This is due to the simple fact that a pension is taxable by virtue of sec. 2(5), which includes: “any pension, charge or annuity”. See also supra n. 173. For an exhaustive study of the meaning of sec. 2(5), see Yoran, A., “Taxation of Annuities and Pensions” (1980) 10 Mishpatim 38Google Scholar.

¹⁷⁵ In this article we shall not deal with the special exemptions for the following pensions: pensions to war invalids and the dependants of soldiers who fell in war: sec. 9(6) of the Ordinance; invalids' vehicle allowances: sec. 9(6A) of the Ordinance; Mandatory Government Employees' pensions: sec. 9(6B) of the Ordinance; invalidity, old-age and survivors' pensions paid by the National Insurance Institute: sec. 9(6C) of the Ordinance; invalidity, pensions paid by a foreign State: sec. 9(6E ) of the Ordinance.

¹⁷⁶ Sec. 9B states: “35 % of the income under sec. 2(5) which is not a pension within the meaning of sec. 9A(a) is exempt from tax”, (but see new amendment passed while this article was been published, text at nn. 183a–183b) while under sec. 9A 35% of the qualifying pension that a person receives on reaching retirement age or that his survivors receive is exempt from tax. The term “qualifying pension” is defined as a pension paid by an employer or benefit fund that does not exceed a certain limit.

¹⁷⁷ See the definition of the term “qualifying pension”, supra n. 176.

¹⁷⁸ Although the retirement age in question is functional and not chronological; see the definition of the term in sec. 9A(a) of the Ordinance.

¹⁷⁹ H.H. 1048 (1973) p. 142.

¹⁸⁰ See secs. 21–22 of the Ordinance and the Income Tax Regulations (Depreciation) 1941.

¹⁸¹ For example, a pension from Germany: see David Asher, supra n. 173; or a charge: alimony payments which are chargeable to tax by virtue of sec. 2(5). See A. Yoran, op. cit., supra n. 174.

¹⁸² Sec. 47A of the Ordinance allows a self-employed taxpayer deduction against his income of 75% of the National Insurance Charges paid by him.

¹⁸³ Assessing Officer Haifa v. Bundheimer (1960) 14 P.D. 16; Stern v. Assessing Officer Haifa (1974) 6 P.D.E. 271. In this article we do not intend to enter into the question of whether the capital component is liable to capital gains tax. On the question of taxing income under sec. 2(5), see A. Yoran, op. cit., supra n. 174.

^183a income Tax Ordinance (Amendment No. 59) Law, 5744–1984.

^183b Supra n. 179.

¹⁸⁴ See sec. 230, T.A. 1970, and the discussion thereon by Tiley, op. cit., supra n. 38 at paras. 32: 19–20.

¹⁸⁵ See s.72, IRC. 1954, and for discussion thereof, see, e.g., Chirelstein, M.A., Federal Income Taxation (Mineola, N.Y., 3rd ed., 1981) para. 2.02Google Scholar.

¹⁸⁶ Supra n. 174.

¹⁸⁷ See text at supra n. 171.

¹⁸⁸ See sec. 47 of the Ordinance, which allows deduction of certain sums saved by the taxpayer in a benefit fund.

¹⁸⁹ For a neat expression of the principle that sums deductible in the past as expenses are chargeable when received back, see, inter alia, sec. 3(b)(1) of the Ordinance and, under the preservation of capital system under the Tax and Inflation Law, the first supplement, for example: restrictions on determination of own capital, sec. 4 (a) of the said supplement.

¹⁹⁰ See supra n. 186.

¹⁹¹ See text at supra n. 171.

¹⁹² By way of an existing correlation in the Income Tax Ordinance: see secs. 9(7A)(d) and (g), and sec. 9A(c).

¹⁹³ The reader is asked to note that due to the need for brevity we have foregone a long and detailed discussion of the general subject of benefit funds and have therefore omitted the many and often significant distinctions between the various types of benefit funds. For a detailed discussion see Edrey, J., Taxation of Income from Employment, Dissertation submitted for the degree of D. Jur. (Jerusalem, 5739–1979) 73–85, 125–127, 154–161Google Scholar.

¹⁹⁴ It should be stressed that in this article we are concerned only with funds that grant benefits to the employee. We shall therefore not deal with funds for different purposes such as sickness or holiday payments, etc. which are intended to secure the employer's ability to meet future obligations towards his employees. Nor will we deal with supplementary training funds.

¹⁹⁵ For a discussion of this topic, see Cahana, Y., A Guide to Life, Pension and Benefit Insurance (Herzliya, 1983) esp. chaps. 4 and 5Google Scholar.

¹⁹⁶ Sec. 3(e) provides that amounts paid by an employer for his employee to a supplementary training fund shall not be taxable at the time of payment if they do not exceed a certain maximum percentage of the employee's salary—8.4% in the case of a teacher and 7.5% in all others. Recently sec. 9(16A) has been added to the Ordinance, providing that monies which an employee draws from a supplementary training fund shall be exempt from tax if 6 years have passed since the date of the first payment into the fund, or 3 years in the case of an aged (65 for men, 60 for women) employee. I t should also be remembered that the supplementary training funds are recognized as benefit funds for the purposes of deductability.

¹⁹⁷ Sec. 17(5) of the Ordinance.

¹⁹⁸ Although it is interesting to note that from the explanatory notes to the Bill for Amendment No. 19 to the Income Tax Ordinance, 5733–1973—which was not passed—it appears that in the proposer's opinion, sums paid by an employer to a benefit fund are taxable at the time of such payment and in the nature of things are also deductible at source. As we have stated, this is not done in practice. See also secs. 3(e) and 3(e1), infra n. 199.

¹⁹⁹ Such express legislation can be found, for example, in sec. 3(e1) of the Ordinance that states that “sums paid by an employer for his employee to a benefit fund which exceed 5 % of the employee's salary or of the entitling income ceiling within the meaning of sec. 47, according to the lower one, shall be deemed the employee's work income at the time of payment into the fund”. Sec. 3(e) lays down a similar rule for supplementary training funds. This approach rejects the possible interpretation of sec. 2(2) of the Ordinance, which provides in sweeping language that income from employment includes “any benefit or allowance given to an employee by his employer … irrespective of whether they are given in money or money's worth, to the employee, directly or indirectly, or to another for his benefit”. In the light of the passing of secs. 3(e) and 3(e1) of the Ordinance, it is inconceivable that the rule is that every payment into the fund, even within the permitted parameters, is taxable at the time of payment.

²⁰⁰ Sec. 3(e) and 3(e1) of the Ordinance and n. 199 above.

²⁰¹ Sec. 45A of the Ordinance.

²⁰² See sec. 3(d) of the Ordinance, which states expressly: “‘amounts paid to the employer’ includes amounts which the employer treated as if they were received from the benefit fund and redeposited therein, and on which he claimed deductions under sec. 17(5)”. On the background to this definition, see Ha'argaz Ltd. v. Assessing Officer for Large Undertakings (1974) 28 (ii) P.D. 190.

²⁰³ See supra n. 202. Obviously he may deduct such payments when he pays them to his employees.

^203a Needless to say; in inflationary conditions on the scale that Israel has seen over the last few years, the nominal capital is worthless.

²⁰⁴ The reader should notice that in our analysis we deal first with the question of tax liability or non-liability, see Witkon J. in Baumel, supra n. 142, and only later with the question of exemption. See supra nn. 65, 69, 142, and below, text at nn. 209, 210.

²⁰⁵ See supra n. 189.

²⁰⁶ Supra n. 201.

²⁰⁷ The accepted theory (which, incidentally, is not entirely free from doubt) is that the tax saving on a credit is equal to the amount of the credit. The tax saving on a deduction is equal to the amount of the deduction (D) multiplied by the taxpayer's marginal tax rate (TM). The amount of the credit is therefore equal to 5% of the entitling income (I) (as stated in sec. 45A of the Ordinance) multiplied by credit rate (C) (25% or 35%). Thus the tax saving on the credit equals I × 0.05C. According to the Model, we wish to obtain I × 0.05C = D × TM and hence For example, a taxpayer with a marginal tax rate of 60% paid 50; that is 5% of his entitling income — 1000. He has a credit of 35%, i.e. 17.5. In this case he will be deemed to have deducted from the contribution 29.166, since this is the sum that, if he deducted it, would represent his tax saving 17.5: 29.166 × 0.60, and therefore at the time of receiving the fund — 50 — he will be taxed on 29.166, while 10.834 will represent the tax-exempt refund—which was not “deducted”—of his capital.

²⁰⁸ Such as contributions to a supplementary training fund. In this case the amounts in the fund are not deductible by the employee at the time of paying in the contribution, and rightly so in our view, since the supplementary training has not yet taken place. Only when that training takes place will it be determined whether the employee can deduct his “supplementary professional training expenses”. See further J. Edrey, op. cit., supra n. 107.

²⁰⁹ Rapack Electronics v. Assessing Officer for Large Undertakings (1976) 8 P.D.E. 487.

²¹⁰ The Ordinance contains the following provisions on the exemptions granted on income derived from receipts from benefit funds: the employee's contributions are not liable because they were not deductible, but see supra n. 207. The employer's contributions are liable, as provided by sec. 2(2) of the Ordinance. However, certain exemptions must be taken into consideration: in the case of a severance pay fund, the amoun t is subject to the exemptions in sec. 9(7A). See Tahal Ltd. v. Assessing Officer Tel-Aviv 5 (1975) 7 P.D.E. 67. If the amount exceeds the ceiling, the excess will be taxed in full. The sources are not considered at all in the case of a provident fund, where all the amounts are tax exempt. Those whose source is the employer's payments are exempt by virtue of sec. 9(17) of the Ordinance and those whose source is the employee's, by virtue of sec. 9(18). In the case of a pension fund, the assumption is that the exemption laid down in sec. 9A will apply. In our opinion, an employee who succeeds in proving that part of the pension is derived from his own payments—which is not at all difficult, since 50% was deposited by him—will be able to claim that only half the pension is liable to tax, and even that half is exempt as to 35%. See supra n. 183.

²¹¹ But see sec. 3(e1), supra n. 199.

²¹² Sec. 47 of the Ordinance. The definition of “entitling income” is “… the total taxable income of an individual before any deduction under this section or under sec. 47A, up to an amount of …. shekels for one year, income from employment being first taken into account.”

²¹³ Sec. 47(b) of the Ordinance.

²¹⁴ See supra n. 201.

²¹⁵ Specifically: 8 1/3% for a severance pay fund. At the time of payment of the contribution it is not taxable and the size of the salary—for the purposes of calculating, the 8 1/3%, is not subject to a ceiling. At the time of actual payment to the employee, severance pay is exempt but subject to a certain ceiling, as stated in sec. 9(7A) of the Ordinance.

²¹⁶ See sec. 9A of the Ordinance.

²¹⁷ Sec. 9A(c) of the Ordinance. The principal is as follows: if within 15 years of receipt of the pension the taxpayer received tax exempt gratuities by virtue of sec. 9(7A), the amount of pension exempt is reduced in inverse ratio to the amount of time that has elapsed between receipt of the pension and receipt of the exempt gratuity, according to the following formula: for the first five years, the pension is not exempt at all, and during the next ten years, the exemption increases gradually, from 3.5% to 35% in the last year.

²¹⁸ See sec. 3(e) of the Ordinance, supra n. 199.

²¹⁹ Sec. 47(b)(2), which refers to a person with income from employment, in respect whereof his employer has not made payments on his behalf to a benefit fund or any other pension plan, nor is he entitled to a pension by law or collective contract.

²²⁰ For a more detailed discussion of this subject, see doctoral dissertation, op. cit., supra n. 193 at 159–160.

²²¹ Ibid., at 335–336.

²²² The amendment to sec. 3(e1) follows this line. See supra n. 199.

²²³ One need not say that this arrangement brings us closer to a cash-flow based income tax system. See e.g., Andrew, W.D., “A Consumption Type or Cash Flow Personal Income Tax” (1974) 87 Harv. L.R. 113Google Scholar.

²²⁴ See supra nn. 94 and 95, but see also n. 226 infra.

²²⁵ Supra n. 96.

²²⁶ Most protective legislation applies only to employees: exceptions are: Night Baking (Prohibition) Law 5711–1951 (5 L.S.I. 53), which forbids the employment of a person at night; Hours of Work and Rest Law, 5712–1951, sec. 9A, which extends the prohibition on working on a day of rest to the owner of a workshop, industrial undertaking or shop; Youth Labour Law, 5713–1953, sec. 3 (7 L.S.I. 94), which prohibits children from engaging in itinerant trading, save under a permit.

²²⁷ See supra nn. 97 and 98.

²²⁸ See sec. 122 of the Ordinance, which authorizes the Minister of Finance, with the approval of the Finance Committee of the Knesset, to fix a uniform tax rate, lower than that in sec. 121 but not less than 25%, for income from shift-work or productivity bonuses in an industrial undertaking. The Minister has used this authority: see Income Tax Regulations (Tax Rate on Income from Work on Second and Third Shifts) 5742–1982.

²²⁹ See, inter alia, the tax incentives granted to investors in industry and in approved enterprises under Encouragement of Capital Investments Law, 5719–1959 (13 L.S.I. 258); Encouragement of Industry (Taxes) Law, 5729–1969 (23 L.S.I. 253); Encouragement of Investment in Agriculture Law, 5741–1981; Encouragement of Investments (Large-Capital Companies) Law, 5734–1973 (28 L.S.I. 16).

²³⁰ For a proposal along these lines, see Edrey, J., “Encouragement of Capital and of Work”, Davar, 27.7.79Google Scholar.

²³¹ See, inter alia, Z. Bar-Niv, “Labour Law”, op. cit., supra n. 79 at 488 ff. See also Israel Agricultural Engineering Co. Ltd. v. Najy (1964) 18 (iii) P.D. 290. And see the remarks of the Minister of Labour in the Knesset on submission of the bill Night Baking (Prohibition) Law, Divrei HaKnesset, vol. 6, p. 2590Google Scholar.

²³² See under headings, 6, 7, 8, and 9 above.

²³³ See, inter alia, Lapidoth, A., “Personal and Territorial Jurisdiction in the Imposition of Tax” (1968) 18 Accountant 504Google Scholar, and Potchebutzky, J., “Taxation and Connection with a State” (1979) 11 Tax Quarterly 19Google Scholar.

²³⁴ Since if the emphasis is on ability to pay, the source of that ability and its location are irrelevant. See J. Edrey, op. cit., supra n. 39 and the references therein.

²³⁵ According to H. Aaron, the exact definition of the term income for tax purposes requires deduction of compulsory payments: “What is Comprehensive Tax Base Anyway?” (1969) 22 National Tax Journal 543Google Scholar. This was also the basic approach of the Carter Commission's system, which spoke of the “discretionary power to consume”.

²³⁶ Godick v. Assessing Officer (1969) 23 (i) P.D. 370.

²³⁷ See secs. 5(2) and 5(3) of the Ordinance.

²³⁸ See our proposal, supra n. 107.

^238a The term “vocation” has been redefined for the purposes of sec. 5(1) of the Ordinance: “Whether the income therefrom is under sec. 2(1) or 2(2)”. This amendment has not yet entered into force, since its application depends upon the making of regulations by the Finance Minister. See secs. 2 and 18(c) of the Income Tax Ordinance (Amendment No. 59) Law, 5744–1984, supra n. 183a.

²³⁹ See supra at nn. 65–72.

²⁴⁰ For such a detailed analysis see Edrey, J., Research Report No. 50/83 (The Israel Institute of Business Research at the Faculty of Management, Tel-Aviv University, 1983)Google Scholar.

²⁴¹ We feel that the fact that Tiley defines a tax system based on these principles as Victorian (Tiley, supra n. 38, para. 5102) suffices to raise the question whether the State of Israel must base its tax system on such principles.

²⁴² See our discussion in Edrey, op. cit., supra n. 39 and the references therein.