Treasury chief economist: Israel's tax burden below OECD average

The tax burden in Israel is slightly lower than the weighted average for the countries of the OECD, while GDP per capita is more substantially lower, according to a report on State revenues by the chief economist at the Ministry of Finance, Shira Greenberg.

Five OECD countries have higher GDP per capita and a lower tax burden than Israel: Ireland, Switzerland, the US, Australia, and South Korea. The case of Ireland is unique, because of the large number of international companies operating from it that swell GDP but pay little tax. The position of Switzerland, the US and Australia is the result of a policy of "small government".

The chief economist finds that the direct marginal rate of tax in Israel is lower than the OECD average for income levels of 67% of the average salary and 100% of the average salary, while for an income of 167% of the average salary this rate is higher in Israel than the OECD average.

The tax burden in Israel fell by 12% of GDP between the peak year of 1986 and 2020. In comparison with 1986, the tax system in 2020 operated with lower income tax levels and higher levels of VAT and taxation on fuel, tobacco and alcohol. The government also had additional revenues from sources other than taxation, such as revenue from government assets, donations, and foreign aid, of NIS 100 billion.

In the past, Israel had a higher tax burden than the OECD average, but the gap steadily narrowed, from an average of 4% of GDP in the period 1995-2002, to 3% of GDP in 2003-2007, until it was closed in 2008-2019. Partial historical data indicate that the gap was as high as 10% on average in the period 1970-1988.

If, according to the Ministry of Finance, the tax burden in Israel Is not high in relation to the OECD, why does the Israeli public feel as though it is being strangled by taxes? The answer appears to lie in the fact that a very large proportion of the population in Israel does not pay direct tax because of its low income. According to the chief economist, in 2021, about half of those with income theoretically liable to tax were actually below the threshold for paying income tax.

Another factor in Israelis' perceptions is that while the tax burden is relatively low in comparison with the other OECD countries, prices are relatively high. Provisional figures for 2021 indicate that, in purchasing power terms, prices in Israel are 22% higher than the average in the OECD.

In 2020, the latest year for which the OECD has published data, the tax burden in Israel was 29.7% of GDP, 1.2% of GDP lower than the weighted average for the OECD countries, and 3.8% lower than the simple average. The difference between the weighted average and the simple average arises from the fact that the US, which alone accounts for 40% of the OECD's total GDP, has a tax burden of 25.5% of GDP, which depresses the weighted average. On this measure, Israel is 28th out of the 38 members of the OECD.

The Ministry of Finance explains that most OECD countries have state pension laws under which pension contributions are paid to a public body, and represent part of the tax burden. In Israel, since 2008, employers have been obliged to pay contributions to pension schemes for their employees, but these contributions are paid to private bodies, and are not considered part of the tax burden.

According to the chief economist, if compulsory pension contributions were counted as tax payments, as in most OECD countries, this would add 2.8% to the tax burden in Israel.

Tax revenues up sharply

State tax revenues rose 22% in 2021 in comparison with 2020, to NIS 384 billion. This is 5.4 times the average rise in state tax revenues in the previous decade. Including payments to the National Insurance Institute and local authorities, total tax revenues for 2021 total some NIS 496 billion.

VAT accounts for the largest slice of state tax revenues, 32% of the total. Income Tax accounts for 30% of revenues, and Companies Tax 12%. The proportion of tax revenues accounted for by VAT in Israel is higher than the OECD weighted average.

Direct tax amounts to 10% of gross income for the lowest earning 10% of the population. The rate rises to 24% for the third highest decile, to 30% for the second highest, and to 40% for the top 10%.

Published by Globes, Israel business news - en.globes.co.il - on March 8, 2022.