Taxes: Who pays, and who receives?

Slicing up the public pie  credit: Shutterstock
Slicing up the public pie credit: Shutterstock

A new study attempts to give an accurate picture of the gaps between different sectors of Israeli society in taxation and public services.

A new academic article, to be published by the Israel Economic Association in its upcoming "Quarterly Economic Review," provides a glimpse into a question that bothers every Israeli: Are we getting our money’s worth from our taxes? If you are a non-haredi Jew, the answer is probably no. The data also disprove common assumptions about who benefits from government spending, and show how the tax system in Israel is progressive, and biased in favor of having children.

The data reveal huge gaps between the different sectors in Israeli society, and show that the average haredi (ultra-Orthodox Jewish) household receives NIS 4,107 more from the state each month than it pays in taxes. The average Arab household receives NIS 1,037, and the average non-haredi Jewish household pays NIS 6,115 more in taxes each month than the value of government services received in return.

Dr. Michael Sarel supervised the research, which was conducted by Ariel Karlinsky, a PhD student at the Hebrew University of Jerusalem. Sarel was previously head of the Economics and Research Department at the Harel Insurance and Finance Group, and chief economist at the Ministry of Finance. After resigning in protest against then-Minister of Finance Yair Lapid's policies, he was appointed director of the Kohelet Economic Forum within the conservative, libertarian think tank Kohelet Policy Forum. The current article is not a Kohelet position paper, but an academic article published in a highly regarded Israeli economic journal. In addition to Sarel and Karlinsky, the paper was also co-authored by Eran Yogev, also of the Kohelet Economic Forum, and by Tom Sadeh of the Aaron Institute for Economic Policy at Reichman University.

"When poverty and inequality data are published, the view is very partial," Sarel says. "Both the National Insurance Institute and the Central Bureau of Statistics only measure direct taxes at the individual level, and government transfers measured are mainly welfare payments."

In practice, however, the services that the government provides are far more extensive than direct transfers, and there is also indirect taxation. Therefore, to find the true effect of the government on households in Israel, one must also include education and health services provided by the government, and government expenditures such as subsidies for public transportation, and culture. On the taxation side, there is also VAT, corporate taxation, customs duties, and other indirect taxes such as on fuel and tobacco. It also requires studying the distribution of taxes and services among households, including difficult empirical questions such as, "Who bears the corporate tax burden?" By employing sensitivity analysis, the researchers managed to obtain a comprehensive picture of the government's effect on households.

The research also posed questions bordering on philosophy, such as how government expenditures on purely public goods, such as national defense and infrastructure, should be distributed among households. But as Sarel explains: "We tested it using several approaches, and all in all, none of them changes the big picture." The report, therefore, provides a unique glimpse into the scope of the government's impact on us, including the distribution on the basis of sector and socio-economic status.

Big families have the biggest impact

One of the most significant findings of the study is the gap between the sectors. As mentioned, haredim tend to receive much more from the state, and pay less taxes. Arabs are in a somewhat more balanced position, while the situation is completely reversed for non-haredi Jews. Even when the various sectors are each broken down internally, the result remains clear: 80% of haredim receive more in government services than pay taxes; 60% of Arabs do; and only 30% of non-haredi Jews do. That is to say, the vast majority of non-haredi Jewish households -- secular, traditional, and religious alike -- pay far more in taxes than they receive in government services. "Non-haredi Jews not only finance public goods and investment in infrastructure, but the other sectors as well," says Sarel.

Why is this happening? There are two main reasons. One is the bias of Israel’s taxation and public spending towards families with many children. According to the research data, families with two parents and one child receive an average of NIS 5,761 per month in government services. With three children, this increases to NIS 11,376, and with six or more children, the value of the benefits jumps to NIS 22,131 per month. Of course, these include non-cash benefits such as education and healthcare.

"We clearly see the effect of the number of children on government expenditure received by a household," says Sarel, "and this is also true on the government income side: more income tax credits and property tax benefits are given to families with low incomes and many children." This is distinctly characteristic of haredi households, and so they receive more, and pay less.

A second reason is the tax system’s progressive nature. It is known that income tax in Israel is considered progressive, and that the wealthy pay most of the direct taxes. A household in the third to lowest decile pays an average of only NIS 292 per month in income tax and capital gains tax, a household in the seventh decile pays NIS 2,243, while one in the top decile pays NIS 15,403.

The novelty of this study is that it takes the entire tax system into account, including the indirect taxes that tend to be less progressive. Nonetheless, it is evident that the poor pay almost no tax in Israel: on average, a household in the bottom decile pays a total of NIS 3,769 in taxes monthly, the fifth decile pays NIS 9,154, and the top decile pays NIS 36,465 a month.

One could argue, of course, that this is a desirable feature of the tax system, and not a bug. But, as Sarel sees it, the usual logic of wealth redistribution may not entirely work when it comes to the haredi sector. "The lifestyle decision leading to poverty is made by haredi society itself," explains Sarel. "It’s not a matter of chance, and is not due to historical factors or discrimination. Therefore, it’s not clear that the rationale justifying income redistribution applies here. On the face of it, the idea is that whoever earns more pays for those who have less, in a sort of 'mutual insurance' against bad luck or worse starting conditions. But in the haredi case, low income is not exogenic, but results from a conscious decision to maintain a certain lifestyle."

The number of children is not exactly accidental either, but an active decision for these households. In Sarel's view, "There is something very deep in the saying, 'children are joy.' After all, below a certain income, one can live at a certain standard of living, and a family can choose to have another child. Is their situation better or worse after that? If children are joy, then even though their economic situation has seemingly deteriorated, their subjective condition is actually better."

Who gets the most from government spending?

The study also makes it possible to see which sectors benefit from government expenditure. For example, the government subsidy for culture, sports and leisure goes first and foremost to non-haredi Jewish households (an average of NIS 344 per month), but, contrary to widespread belief, haredi households also benefit from the subsidy, at NIS 310 per month on average. The Arab sector, on the other hand, receives only an average of NIS 232 per household for such activities.

A breakdown by income deciles reveals another interesting phenomenon: wealthier households are subsidized more than poorer ones, meaning that the culture budget is actually a regressive budget that benefits the rich more.

On the other hand, the public transport subsidy clearly benefits haredi society (NIS 502 per month on average) much more than non-haredi Jews (NIS 217 per month), while the Arab sector benefits even less (NIS 203 per month). Haredi communities receive positive discrimination on ticket prices because they are poorer, on average, and because they use public transport much more than any other sector. This effect was amplified recently by the price reform initiated by Minister of Transport Miri Regev, which increased the government subsidy for ticket prices.

However, Sarel points out, "It is important to remember that the research does not deal with normative questions about what ought to be done, and makes no judgment about what policy is desirable. Instead, we want to describe the existing situation in the most accurate way possible. Anyone can take the empirical data and draw conclusions according to their positions and values. But unlike the situation up to now, in which we were compelled to rely on gut feeling and estimates, from now on it will be possible to rely on real data."

Sarel gives an example of a government policy that the research was able to pin down. "Let's say the government raises the VAT rate by one percent, and gives all the money to education services for students from the weaker social strata. It's clear this is a progressive policy, because those who are rich will pay more, and those who are poor will receive more. But in the official Israeli data, the effect on inequality will be zero! This is because indirect taxes and government services, other than welfare payments, are not measured. Our method provides a far more accurate picture of government policy and its effects, both in terms of redistribution, and among the different sectors."

In this way, the researchers hope, economic discourse in Israel will become more fact-based, and allow decision-makers to allocate government revenue and expenditure more wisely, on the basis of real data.

Published by Globes, Israel business news - - on July 9, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Slicing up the public pie  credit: Shutterstock
Slicing up the public pie credit: Shutterstock
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