The lowering of tax rates on earnings in Israel between 2003 and 2009 has substantially reduced the average rate of tax on high salaries, where the tax burden in Israel is high in comparison with developed countries, according to new research that appears in the Bank of Israel's report for 2008. On the other hand, the fall in tax rates on middle and low incomes was smaller, both in absolute terms and relative to developed countries. Even after the tax cuts, taxation of earnings in Israel is more progressive (the rich pay more than the poor) than in most developed countries, but less so than in the past.
The Bank of Israel notes that because effective tax rates in the developed countries were hardly reduced between 2003 and 2009, tax rates in Israel in relation to these countries fell, and are now lower than the mean and median at salary levels that apply to more than 90% of workers.
The Bank of Israel's economists also found that, in comparison with the norm in the developed countries, the tax system in Israel is characterized by low tax rates at the lowest levels of earnings, alongside few benefits for workers on the basis of their family status. This structure magnifies poverty among families with a single breadwinner, but encourages going out to work by young people and women, particularly mothers.
The publication of this research now may be coincidence, but the findings certainly have a bearing on the important difference of opinion on economic policy between Governor of the Bank of Israel Stanley Fischer and Prime Minister designate Benjamin Netanyahu. Fischer believes that there is no room now for continuing to reduce income tax on individuals. One of his arguments is that the large deficit that Israel will have to deal with does not allow this. However, there is also another argument heard at the Bank of Israel, namely that direct taxation of employees is already not high compared with rates in the OECD countries (the main claim of the research), and therefore there is no urgency about carrying out further cuts.
Meanwhile, the ratio of debt to GDP is still exceptionally high in comparison with the developed countries, and therefore reducing it should be given priority over reducing direct taxation in Israel.
Netanyahu and his associates on the other hand argue that the first step that should be carried out is the continuation of the direct tax reduction this year. They process of reduction should be maintained over the next four-and-a-half years, until the maximum rate of direct taxation on individuals reaches 36%, and corporate income tax reaches 18%.
Published by Globes [online], Israel business news - www.globes.co.il - on March 23, 2009
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