Members of the Trajtenberg committee ceaselessly declaimed that the main beneficiaries of its recommendations would be young couples, especially if they had children younger than 9. The committee members said that the net income of these families would grow by up to NIS 2,400 through tax breaks and exemptions of education fees.
The real question is who would finance these benefits, and the publication of the committee's report clearly implied that it would be the rich, specifically the top 1% of income-earners. People earning more than NIS 40,000 a month (about 41,000 employees, according to the Israel Tax Authority figures for 2009), would pay a new top income bracket of 48%.
But a simulation by the Tax Authority on the recommendations' affect on families' net income resulted in a completely different picture. People earning NIS 40,000-134,000 a month would actually see a net income monthly increase of NIS 700-50,000, provided that they are not registered as a company. The reason is that while the Trajtenberg committee proposes a new income tax bracket, it also took the opportunity to fight against the widespread practice of "wallet companies" - salaried employees who set themselves up as companies in order to save tens of thousands of shekels a year in taxes.
This distortion was created two years ago, in the Economic Arrangement Law of 2009, in which the Ministry of Finance raised the ceiling for National Insurance levies from five times the average national salary to nine times (about NIS 75,000). The ministry said that the temporary directive was supposed to reduce the deficit, but it has been extended, and the Trajtenberg committee decided to restore the previous ceiling, which amounts to around NIS 40,000.
The result is that a person with a gross monthly salary of NIS 75,000, who currently pays NIS 8,387 a month in National Insurance, will pay half this amount in 2012 - NIS 4,561. His or her take-home pay will increase by NIS 3,862, while the higher tax bracket will reduce this by no more than NIS 1,000.
At the same time, the Trajtenberg committee recommends eliminating income tax breaks to salaried employees, which mainly benefit the middle class - people who earn NIS 8,500-14,000 a month.
The Tax Authority simulation found that only people earning more than NIS 134,000 a month - a few hundred people altogether - will see a reduction in their take-home pay, because the reduction in their National Insurance levies will be less than the increase in their income tax.
The picture partly balances out if the proposed capital gains tax hike is added to the equation. But here, too, huge capital gains are necessary for substantial taxes to be paid on them. People making capital gains of NIS 10,000-50,000 a year will pay NIS 500-2,500 more in taxes. This assumes a 5% return on a NIS 1 million investment portfolio, which yields NIS 50,000.
The tax on NIS 1.5 million in capital gains amounts to NIS 120,000 - but only a NIS 30 million portfolio with a 5% annual return can achieve such a figure.
This is not the only distortion. The Trajtenberg committee's tax team, headed by National Economic Council chairman Prof. Eugene Kandel, recommends raising the companies tax rate to 25%, the rate in many countries, and cancelling the planned tax cut to 18%. While this appears to be a welcome measure, in practice it will only hurt small and mid-sized companies, because big companies will continue to benefit from the tax breaks embodied in the Law for the Encouragement of Capital Investments.
It would be wrong to blame Kandel and his team - what could an expert committee do in just 50 days? The real problem is that Israel's tax system was created incrementally, without any overall perspective or strategy. It includes uncountable exemptions, which widen inequalities. Well-organized special interest groups, employing top advisors and lobbyists, know how to keep their perks. If Manuel Trajtenberg were to open this Pandora's Box, it would destroy the entire proposed tax package.
The tax core needs a thorough overhaul, not incremental cosmetic changes which merely replace one distortion with another.
Published by Globes [online], Israel business news - www.globes-online.com - on October 3, 2011
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