First, much of what you wrote I once believed myself. Maybe I was right the first time ;) Anyway, I hope you can keep that in mind.
As some of my Israel friends love to tell me ad nausea, there are no "Palestinians". Oren points out, no "Palestine" on the map. The argument is to dispute current claims, but they don't think about what that would mean back then. If true, what are those "Palestinians" who should work for their own State? When did they ever ask for one? If they never really existed why should we believe there was such a group to get their own State? (Britain controlled the Levant for decades).
Who was offered a "Palestinian State" is a complex question. IMO, there was never a real offer for a Palestinian State. That is the FICTION I bought into, and I believe Oren. What there was, was an offer for an agreement on how to isolate refugee Arabs in Israel. It wasn't those "Palestinians" who refused, it was the Arab money funding military groups within that population.
I don't believe most Palestinians would want Jews dead if they didn't live like prisoners in Gaza, or unequal under Israeli law in the West Bank. As others have pointed, out, when external forces aren't present, everyone more or less gets along. The religions share a common heritage.
I would never want someone to accuse me of wanting Muslims dead because of 9/11. I try to extend the same respect to others.
If Israel made all its inhabitants citizens. Jews would lose their majority in government. This is essentially what happened to blacks in the U.S. in the 1960s. However, blacks are only 14% of the U.S. population, so it was easier.
Even the most liberal Jew probably worries about living in such a true democracy. So they tell themselves Palestinians want them dead, or other reasons, to countenance the current trend towards expelling most Jews from Israel.
Israel can't survive in its current form as a democracy. Or maybe it can, but the will to try is gone. All these issues aren't new. What's new is Gaza was much worse than most thought (not me) so the only way forward is, well, nothing good for the "Palestinians."
My answer is Israel needs to stop playing so dumb. It can make a good home for the Palestinians if it tries. It's never tried. It tries a little bit, some Arab kid blows up a cafe (with money from Iran) and then the Israel's say "We tried, not our fault."
I say, maybe you didn't try hard enough.
