Israeli stock market plummets

TEL AVIV, ISRAEL — TEL AVIV, Israel -- The Israeli stock market plummeted nearly 10 percent in trading yesterday, as jittery investors were given the first chance to react to a government decision last week to impose a capital gains tax on stock profits.

The benchmark Mishtanim index fell 18.22 points, or 9.93 percent, to 165.18, and analysts expect further declines this morning.


The market erupted early into pandemonium as sellers unloaded stocks. Tel Aviv Stock Exchange officials said that trading started with sell orders of 2 billion shekels, or $660 million.

Market officials, for the first time in the exchange's 40-year-history, lifted a 10 percent limit on the fluctuation of share prices within a single day. The market's usual closing time was also extended by four hours. Losses on individual share prices ranged between 10 and 20 percent.


Ninety minutes into trading, the government attempted to soften the effects of the new tax, allowing stock profits to be offset against losses. But brokers said the change had little effect on the market.

"If every sale that was profitable was taxed a flat 10 percent, regardless of other losses, your grand total at the end of the day could be a big loss," said Eddy Shalev, the director of the Tel Aviv office of Oscar Gruss & Son, the largest dealer of Israeli stocks in the United States. "You would end up not with a 10 percent real tax, but a much higher tax."

The market was taken by surprise on Tuesday when the government announced that it would impose a 10 percent tax on stock profits beginning Jan. 1. The government then closed the market until yesterday.

Prime Minister Yitzhak Rabin said in June 1993 that he would not impose a capital gains tax. But last Monday, Israel announced a higher than expected 1.1 percent rise in inflation for July. The figure brought the annual inflation rate to 13.5 percent, well over the official forecast of 8 percent. Mr. Rabin, treasury officials said, was persuaded that the tax would help curb inflation.

"When speaking of a prime minister and finance minister, don't expect them to tell the whole truth when speaking of a devaluation or when speaking of a new taxation policy," Mr. Rabin said after the announcement last week.

"This temporary instability will finally result in a much more stable stock market," Finance Minister Avraham Shohat said. "To make big changes, and to be part of the outside world, we must, like other countries, impose a capital gains tax."

The opposition Likud party, which opposes the measure, called yesterday for a special session of the Parliament to debate the tax, which, in its initial form, is expected to raise about $167 million a year.

"This is total chaos," said Binyamin Netanyahu, the head of Likud. "It is not the way to build an economy."


Treasury officials said yesterday, after the amendment to the tax, that investors could now choose between options when purchasing stocks. The first option will allow investors to pay a flat 10 percent on any profits. The second option will allow investors to make any losses tax deductible, but subject any profits made on the market to a 20 to 25 percent tax.

The capital gains tax comes as other taxes, like import taxes on items like computers as well as purchase taxes on housing, have been lowered. Taxing share profits, they said, will bring in revenues that will permit the government to cut other levies, like import duties on raw materials that have fueled rising retail prices.

"I hope this in-between stage is short," said Jakov Frenkel, the governor of Israel's Central Bank. "The main reason for taxing capital gains was to introduce reason and order into the economy and to cut other taxes that have a much more destructive effect on the public."

The stock exchange, to prevent a steeper decline, only permitted limit orders, thus making it impossible to assess the full impact of the new law. Heavy losses, at least early in the day, are expected today when the market, will, for the first time, allow market orders.