People with low incomes could soon pay less in direct taxes, but higher-income earners and corporations could pay more, after the cabinet on Sunday unanimously passed a substantive amendment to the country’s taxation regime as outlined in the Trajtenberg Committee’s recommendations.

Subject to Knesset approval, the amendments will become law on January 1, 2012. However, the Finance Ministry warned that it was difficult to generalize on the substantive tax changes. Although the intent was to reduce consumer costs, some fees will go up, a spokesman said.

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“The government’s decision today will be felt by the consumer’s pocket,” Prime Minister Binyamin Netanyahu said. “We will continue to budget responsibly to avoid the global economic turmoil,” he added.

Sunday’s vote marked the first passage of a section of the Trajtenberg Report. The cabinet plans to vote on the other three sections – housing, competition and social services – in three weeks. The report was commissioned by the government in response to this summer’s wave of public protests over the cost of living.

Sunday’s decision applies broad changes to both direct and indirect taxation, and promises the eventual removal of import duties.

Under the proposed amendments to the income tax system, the highest tax rate, for monthly income exceeding NIS 40,231, will rise from 44 percent to 48%, while the rates for the next three brackets will rise from 32% to 33%, 29% to 30%, and 21% to 23%, respectively.

In addition, a flat 2% “high-earners tax” will be imposed on all yearly income exceeding NIS 1 million.

The rates for the two lowest income brackets will remain unchanged.

The capital gains tax (on dividends, sales of shares, etc.) will rise from 20% to 25%, and for those with substantial shareholdings it will rise from 25% to 30%. The company tax will rise from 24% to 25%.

Fathers with young children stand to benefit the most from the changes, after the cabinet approved granting tax credits to men for every child up to the age of three. This translates to a tax break of NIS 418 per month per child, or just over NIS 5,000 per year. Tax credits for mothers for every child up to age 18 will remain, as will additional credits for mothers with children up to the age of five.

The gasoline excise will be canceled altogether, benefiting consumers by an estimated NIS 2.5 billion per year.

The price of a liter of gasoline will drop by 40 agorot and the price of a liter of diesel fuel (used among other things in public transportation) will drop by 20 agorot. The price of a ton of coal, which is used to produce electricity, will drop by NIS 34.

The value-added tax will stay at 16%, and will not drop to 15.5% on January 1, 2013, as was previously planned.

Import duties on all products where there is no domestic competition will be removed entirely on January 1, 2012.

Duties on all other goods, excluding vehicles, vehicle parts and agricultural goods, will be gradually reduced, depending on whether or not Israel signs trade agreements with the country where the imports originated.

For countries with which Israel signs trade agreements up to the end of 2014, import duties will gradually be reduced until their complete removal by January 1, 2017.

For countries with which Israel does not sign trade agreements, the import duty will be reduced by 10 percentage points from its current rate in 2013 and by a further 15 percentage points the following year. After that the finance minister will decide whether to implement the Trajtenberg Committee’s recommendation that import duties be removed entirely.

Tovah Lazaroff contributed to this report.

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