Income of the top percent in Israel between 2013 and 2021 totalled about NIS 100 billion per year, according to a study by the Israel Tax Authority. The study found that the top percent has 13.2% of all income and pays just 26% of its income in direct taxes.
The minimum income needed to be part of the top percent was on average NIS 1.4 million per year, and the average annual income of a person in the top percent was about NIS 4 million. Unlike the rest of the population, where most income is from work, about two-thirds of the income of the top percent comes from capital income, with about half of it originating from dividends, interest, rent, etc. and the other half from capital gains from the sale of assets.
Looking at the composition of the income of the top percent from work (income from salary, allowances, professional services and business), from capital income (dividends, interest, rent, etc.) and from capital gains (sale of assets such as stocks, options and real estate) - income from work is on average for a household in the top percent ‘only’ NIS 1.2 million per year, only about 30% of the income.
Thus the average capital income per household during the period examined by the Israel Tax Authority, was NIS 2.4 million annually, double income from work, and the volatility in this type of income is greater, especially in 2017 when the large income from dividends (following the release trapped profits) increased the average capital income by double the annual average to NIS 4.6 million per household. In total, capital income during the entire period was 62% of all income.
The income of the top percent has been presented by the Israel Tax Authority to assess inequality in the economy and formulate tax policy. The analysis includes reference to the sources of income of the top percent and the tax payments on these sources and presents an international comparison of the income rate of those with the highest incomes out of all household incomes, before and after tax. The data show what the majority of the public already felt - the top percent works less, earns more and pays lower tax rates.
From the analysis conducted by the Tax Authority Planning and Economics Division, it appears that Israel is characterized by a relatively high proportion of the income earned by the top percent out of total national household income, before and after tax. The share of the top percent, the top 0.1%, and the top (0.01%) out of all household incomes before tax is on average 15%, 7.4% and 3.6%, respectively. After tax the figure falls to 13.2%, 6.8% and 3.3%, respectively. In other words, the reduction of the share of the richest Israelis in the national income through the tax system is relatively low.
The data also found that the household income of the top percent has been gradually increasing over the years at an average real rate of about 6% per year.
The richer you are the lower the tax rate
Segmenting income within the top percent is very unequal. The top 0.1% has 50% of the income of the top percent and the top 0.01% has 50% the income of the top 0.1% and 25% of the income of the top percent. Moreover, capital income becomes even more dominant with the top 0.1% and 0.01%.
Total direct taxes per individual paid by the top percent is about NIS 25 billion representing 9% of all taxes paid to the state.
The analysis shows there is also regressivity in the effective tax rates within the top percent. While the effective tax rate of the top percent without the top 0.1% is about 29%, the average effective tax rate in the top 0.1% without the top 0.01% was about 23% and the average effective tax rate in the top 0.01% was about 21%. This means that the richer you are, the lower the tax. The Israel Tax Authority notes these regressive gaps were partially reduced during the period under review.
An international comparison conducted by the Israel Tax Authority, shows that in terms of the top percent’s share in total national income, which is a key indicator for measuring inequality in the economy, Israel is somewhere between European countries and countries on the American continent (North, Central and South). The degree of progressivity of the tax system is more similar to countries in the Americas than Europe.
Published by Globes, Israel business news - en.globes.co.il - on August 5, 2024.
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