In just over two weeks, the salaries of Israelis, mostly from the middle and upper classes, will shrink by NIS 416 a month, when the fiscal package that the cabinet approved in mid-year comes into effect on January 1, 2013. The fiscal package includes tax hikes from the fourth tax bracket and higher and lowers the upper limit on the third, fourth, and fifth tax brackets.
According to the Israel Tax Authority, people earning a gross monthly salary of NIS 15,000 will see a NIS 50 reduction in net pay; people earning NIS 20,000 will earn NIS 100 less; and people earning NIS 40,000 or more will earn NIS 350-370 less. This tax hike, which is expected to generate NIS 1.2 billion in revenues, comes on top of the 1% extra VAT take, which came into effect on September 1.
Tax shortfall is not closed
However, this amount is far from sufficient to close the huge shortfall of NIS 5-6 billion (at best) on the revenues side. The fiscal package, published in June, was supposed to generate NIS 14 billion, but three key measures, which were supposed to generate NIS 1.75 billion altogether are stuck: Knesset Finance Committee chairman MK Moshe Gafni (United Torah Judaism) blocked the surtax (which was supposed to generate NIS 400 million); the employers' tax hike (NIS 1 billion); and the vehicles tax hike, which Minister of Environmental Protection Gilad Erdan has stymied.
The original fiscal package pushed through by Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz earlier this year also includes two measures to raise NIS 5 billion: tighten tax collection, and the trapped profits law. The Tax Authority says that, even after the Knesset passed the legislation, it will take a long time to hire and train the necessary employees, which means that it will not be possible to depend on revenues from tighter tax collection for the next two years. As for the trapped profits, the Tax Authority, the Bank of Israel, and even Ministry of Finance officials, admit that companies are in no hurry to pay up, and the lacunae in the previous law remain in the amendment. In other words, companies are not lining up and tax revenues will be little, if any.
The Ministry of Finance and the Tax Authority say they would prefer the revenues to come from cancelling tax exemptions, which total around NIS 39 billion. But they admit that these cancellations largely depend on the political will of the next government, which cannot be relied on.
The Ministry of Finance and the Tax Authority are therefore returning to the tried and true: tax hikes for all tax brackets, including the lower brackets which were unaffected by the previous hikes; and another VAT hike. The officials do not conceal this in conversations behind closed doors, but refrain from mentioning it in public because of the sensitivity during the election campaign.
A 1% VAT hike would generate NIS 4 billion in revenues, and a 1% income tax hike would generate NIS 2.5 billion. If the bottom two tax brackets are exempted, the additional revenue will be halved to NIS 1.25 billion, which means a larger tax hike would be needed on the other brackets. As for those demanding to tax the rich, each 1% tax hike on the highest tax bracket would generate just NIS 140 million in taxes.
Published by Globes [online], Israel business news - www.globes-online.com - on December 16, 2012
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