The State Revenues report for 2008-09 reveals that Israel leads in indirect taxes - regressive taxes that hurt the poor, and has the lowest income tax levels as, the government cut direct taxes and raised indirect taxes. The report also shows that Israel's tax burden is no longer onerous. The overall tax burden in 2009 was 31.4% of GDP, close to the OECD average of 31.1%.
However, a breakdown of taxes by type, shows that Israel diverges sharply from the average toward the extremes. Israel has the lowest ranking for direct taxes (taxes on individual and companies' income, and the capital market) in the OECD, after the government implemented its policy to slash them. In 2009, the direct tax burden was 13.4% of the labor cost of a childless individual with a salary that was 67% of the average wage, compared with 32.4% for OECD states. This figure put Israel 30th of 31 OECD members.
The Ministry of Finance says, "This is the result of low income taxes. National Insurance levies on employers are even lower, compared with the OECD average."
Israel was the fastest tax cutter in the OECD. Israel was in first place in the reduction of direct taxes as a percentage of labor costs in 2002-09.
The cuts in direct taxes are financed by a jump in indirect taxes (VAT, purchase tax, and customs duties). Israel's VAT, the primary indirect tax, had the highest in the OECD as a percentage of total tax revenues, at 33.5%. This situation has since worsened, as the Netanyahu government, which came to power in February 2009, has further raised indirect taxes while reducing direct taxes.
The government also allowed NIS 38.4 billion in tax breaks, amounting to 18% of total tax revenues. The State Revenue Division calculates that if all tax breaks were abolished, overall taxes could be cut by 15%.
A breakdown of the tax breaks clearly shows that they increase with an individual's wealth. The government foregoes NIS 10.2 billion in taxes on revenue from provident and advanced training funds, NIS 6 billion in taxes on gains from interest and capital investments, and NIS 2.2 billion in betterment taxes.
Published by Globes [online], Israel business news - www.globes-online.com - on June 27, 2011
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