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Shabbat Parashat Bereishit 5773

Ask the Rabbi: Taking Interest that Accompanies Tax Refunds

by Rav Daniel Mann

Question:  When one’s tax return shows that the taxpayer deserves a refund, the Israeli government gives the refund with interest, according to the time that has passed. Is receiving such an interest payment a violation of ribbit (usury)?

 

Answer:  We will summarize our old response explaining why it is permitted to buy Israeli bonds, and thus take interest from the Jewish State (see Living the Halachic Process, vol. I, F-6), as the questions overlap. Then we will focus on some differences.

Several poskim, (including Igrot Moshe, Yoreh Deah II, 62-63) permit taking interest from Jewish-owned corporations because ribbit is forbidden only when a borrower has personal liability. Even some who disagree with that claim (see Brit Yehuda 7:(66)) permit lending to the Israeli government because a government has no clearly defined owners, but is an amorphous representation of an ever-changing population (see Har Tzvi, YD 126). The Treasury also has a general heter iska (a halachic device that turns an ostensible loan, where interest is forbidden, into an investment of sorts, in which the additional money returned is to be viewed as returns on a successful investment).

Among the aforementioned logic, there is a difference in regard to the heter iska. While many view a heter iska just as magic that causes the prohibition to disappear, it actually is done by changing the rules that determine how much money will be returned. (It is even possible that not all the principal will have to be returned). Both sides to the transaction must agree to the heter iska’s terms for it to be valid. When one decides to buy government bonds, he agrees to the rules that govern them (even without reading the fine print). When one deals with a bank, he similarly accepts the terms of their general heter iska, the agreement between the bank and its customers, which includes the principles of iska. In contrast, when does a person whose income is withheld for income taxes accept the terms of an iska agreement? (It is difficult to claim that it is when he decides to live and/or work in Israel.)

On the other hand, there are grounds for leniency that apply to tax refunds and not to government bonds. One of the basic rules of ribbit is that the Torah forbade paying interest specifically to the one who had lent money to the borrower (Bava Metzia 69b). When a worker has taxes withheld, he actually does not give money to the tax authorities. Rather, the government requires the employers to give them the money (which entitles the employers to pay the worker less than the gross salary). In fact, if they fail to do withhold properly, the employer is legally accountable. Thus, when the Treasury pays the employee with interest, they are not paying money to a lender. This idea, though, will not work for prepayment of taxes by self-employed individuals, as they pay themselves.

The most significant leniency that applies in this case is a result of the distinction we made above: the taxpayer does not choose to pay the tax authorities or agree to the timing of the payment and the refund. All decisions are made unilaterally by the government, and barring an unusually corrupt system of levying taxes (no cynicism, please), they can make up rules under which they increase or reduce them. Several poskim (see Netivot Shalom 176:7:25) use this logic to allow the government to take interest from a taxpayer who owes money. Since the government can take additional money as they see fit, we do not consider their decision to do so when one pays late as equivalent to interest on a loan. Similarly, they are permitted to give discounts for early payment of taxes (Torat Ribbit 10:69), which is common regarding municipal tax. The same logic applies to their decision to give a grant to those from whom too much was withheld, and it is not considered forbidden ribbit.

By means of any combination of the arguments above, it is certainly permitted to accept an income tax refund with interest.

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