Tax breaks for various groups, often called "exemptions", will total NIS 44.25 billion in 2013 and will rise to NIS 44.5 billion in 2014, according to estimates published by the Ministry of Finance on Tuesday at the end of the 2013-14 Budget Book. The amounts equal 19% of total tax revenues and 4.5% of GDP - almost the same as the size of budget deficit for this year.
Tax exemptions totaled NIS 39.6 billion in 2012; the 2013 figure amounts to an increase of 12.4%, or almost NIS 5 billion. Most of the increase is due to the planned update of income tax brackets over the next two years.
The NIS 14 billion tax package is the budget's Achilles heel, and is already causing fierce opposition in the Knesset. The numbers at the end of the Budget Book shed light on the distortions involved in keeping the tax breaks in place at a time when tax rates are being raised for the general population, including the poor. The Budget Book states that if all tax breaks were cancelled, it would be possible to lower VAT to 16%, lower income tax rates by 5-15 percentage points, and lower the companies tax by six percentage points.
According to Ministry of Finance estimates, tax breaks under the Law for the Encouragement of Capital Investments, from which companies such as Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), Israel Chemicals Ltd. (TASE: ICL), Check Point Software Technologies Ltd. (Nasdaq: CHKP), and Intel Israel Ltd. benefit, will rise to NIS 6.7 billion in 2013 from NIS 5.6 billion in 2010. The 2013 tax break is NIS 2.3 billion more than ten years ago.
The biggest tax break is the exemption on pension savings, which totals NIS 16-17 billion in 2013-14. The tax break on advanced training funds (essentially tax free savings) will almost double from NIS 2.4 billion in 2010 to NIS 4.4 billion in 2014. Cancelling this exemption would have prevented the VAT hike, which mostly hurts low income-earners, or prevented the income tax hike across all tax brackets.
The Ministry of Finance says that if the tax break on the health tax and National Insurance levies are taken into account, the loss in tax revenues will total NIS 5.8 billion in 2014. It adds that 34% of salary-earners benefit from the advanced training funds tax break: 93% of the top 10% of salary-earners are eligible for this tax break, compared with just 2% of the lowest 10% of salary-earners. In other words, this is one of the most regressive tax breaks in the Israeli tax code.
The Ministry of Finance estimates that the VAT exemption on fruits and vegetables will cost NIS 2.1 billion in 2013, rising to NIS 2.8 billion in 2014. Cancelling this exemption would make it possible to cancel the austerity measures on housewives, people with academic degrees, and the purchase tax on people buying bigger homes (which are estimated at NIS 2 billion altogether), as well as dropping the income tax hike on lower tax brackets. The ministry believes that the Knesset Finance Committee will approve this cancelling this tax break, but that committee members want the ministry to make the proposal.
In addition, the VAT exemption on tourism services will cost NIS 1.1 billion a year from 2014, and the VAT exemption in Eilat will cost NIS 780 million a year from 2014.
Published by Globes [online], Israel business news - www.globes-online.com - on June 12, 2013
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