Let us suppose for a moment that a new person was appointed Minister of Finance last night who believes in widening Israel's social gaps and strengthening the rich at the expense of the poorest sectors of the population. What would be the first two measures that he would ask his officials to implement after assuming office? "To lower income tax and company tax," any beginner in the Ministry of Finance would say.
Assuming that reports yesterday that the Minister of Finance is targeting cutting income tax and company tax are correct, the question arises about Moshe Kahlon was thinking when he decided to seriously discuss to lower those two taxes and why he has a burning desire to be portrayed as a friend of the wealthy. Is it just to encourage growth in the economy? Or has there been a political deal, electoral ploy or perhaps even a deeper ideological change that Kulanu's leader has undergone.
"The most evil tax is VAT. The most just tax is inheritance tax," Kahlon himself said just four months ago. If so, then why does Kahlon not again plan reducing VAT? After all he has already cut company tax and despite that he plans lowering it again even though those who profit are the rich whose source of income are the dividends from the companies they own and control.
The Van Leer Institute published last month research, which found that for any cut in company tax, society's wealthiest 10% earned 2.5 times the other 90% of society put together. The official motivation of the Minister of Finance in cutting company tax is to encourage growth. If companies have more money after paying tax, they can expand and from their growth their employees will benefit. On paper this theory sounds logical. In practice, there is no lack of examples of sectors where profitability has risen by tens of percentage points in recent years without employees enjoying a single crumb from the cake. The controlling owners grabbed all the extra profit and put it in their pockets.
There is no inheritance tax in Israel because Prime Minister Benjamin Netanyahu opposes it. But income tax is the number one tool in the world to redistribute wealth and reduce social gaps. Income tax brings NIS 64 billion annually into the state's coffers. The average rate of tax paid in Israel is 12.8%, one of the lowest of any OECD country. This already makes the influence of income tax on reducing gaps in Israeli society very low compared with income tax in European countries and only the capitalist US and Mexico have lower income tax rates. The burden of direct tax was one of the main topics during the social protests in 2011.
Kahlon's closest advisors claim that the planned changes in income tax will lowervtax rates for the middle class without changing the rates that the wealthy pay. How is that possible? The idea is to stretch down higher tax thresholds and stretch up the lower tax thresholds. So if the tax threshold for 14% ends at NIS 9,000, it will be stretched up to NIS 14,000, and the tax threshold for 34%, which begins at NIS 19,000 will begin at NIS 14,000. By this theoretical calculation, somebody with a salary of NIS 14,000 will pay less tax and somebody with a salary of NIS 30,000 will pay about the same.
But even in this scenario, it should be remembered that 54.4% of salary earners and 33% of the self-employed in Israel pay no income tax, so even this most brilliant idea of changing income tax won't add a shekel to their available income. If you take into account that only 14% of income tax paid derives from people earning less than NIS 14,000, so who exactly will enjoy the reduction in income tax, other than the rich.
Published by Globes [online], Israel business news - www.globes-online.com - on July 11, 2016
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