Happy Tax Freedom Day!

On July 14 Israelis celebrated their Tax Freedom Day (TFD). Tax Freedom Day marks the day Israeli taxpayers stop working for the government and can now enjoy working for themselves.

By CORINNE SAUER
New shekel notes 370 (photo credit: Courtesy Bank of Israel)
New shekel notes 370
(photo credit: Courtesy Bank of Israel)
On July 14 Israelis celebrated their Tax Freedom Day (TFD). Tax Freedom Day marks the day Israeli taxpayers stop working for the government and can now enjoy working for themselves.
TFD is calculated by taking the ratio of total taxes paid by the Israeli population over Israel’s Net National Income (NNI), according to data published by the Central Bureau of Statistics (CBS), the Finance Ministry and the Bank of Israel.
Since Tax Freedom Day is a ratio of taxes to NNI, TFD moves forward when tax collection grows faster than the growth of the economy. In 2013, Israel’s NNI is expected to increase by 3 percent but tax collection is expected to increase at a higher rate of close to 9.5%.
The fact that Israel’s Tax Freedom Day arrives much later than in the US (April 8), Canada (June 10), Australia (April 5), the UK (May 30) and the majority of other developed countries is no surprise.
TFD is an average for all Israelis. For some individuals, their personal TFD could be earlier (if they pay less taxes than the average) or later (if they pay more taxes than the average). TFD makes it simple for taxpayers to realize just how much of their money is transferred to the government each year.
The visible part of taxes taken in the form of income tax, national insurance contributions and health tax can be easily calculated by anyone.
However, hidden taxes and fees like customs tax, fuel tax and purchase tax are often overlooked. However, those taxes accumulate to many working days for the average Israeli. Individual income taxes represent 38 work days but sales taxes (VAT) represent 44 days of work. National Insurance contributions account for 33 days but import taxes account for 25 days. In total, Israelis work 197 days out of the year only to pay taxes.
Why do Israelis have to work so many days to finance government coffers? Israeli government spending is set to reach NIS 388.3 billion in 2013, which is more than NIS 48,000 for each individual living in Israel. For a family of four, government spending is more than NIS 194,000 a year.
While most Israelis would agree that taxes are an inevitable part of living in a developed society, realizing that on average 54% of our salaries go into the government’s coffers reveals a major problem with the system.
It is certainly not clear that Israelis receive public services worth this amount of money; in fact 35% of the total public budget is earmarked to repay the interest and principal on loans that the government took out in the past.
This has little current consumption value to Israelis.
In order to cover past governments’ overdraft, Israelis have to work 69 days a year.
This is a reminder that when governments take out loans to finance their expenditures, the dubious short-term benefits of such an action usually lead to a substantial increase in the tax burden on future generations.
Interestingly, Israelis work much less to cover the education bill (only 24 days), welfare and social services (26 days) and health expenditures (12 days). Although Israel’s high tax burden is often attributed to the security situation, Israelis only worked 28 days in 2013 to finance the defense budget.
Taxes not only reduce the average Israeli’s disposable income, they also hamper economic growth. The level of taxation affects economic decisions and can discourage productive economic behavior.
Income tax discourages work, tax on capital gain reduces savings and investment and corporate tax decreases foreign investment and company formation.
Even the government may suffer from a high tax rate, as the Laffer curve demonstrates.
The Laffer curve represents the relationship between rates of taxation and government revenue from taxes. It shows that beyond a certain point, increasing tax rates will actually reduce tax revenue, as people will start working, saving and investing less.
There are ways to reduce this heavy tax burden but it will require a new mindset by our politicians and economic leaders to embrace the idea of outsourcing and privatizing government companies that serve as a major drain for the national treasury.
Also, future gas revenue should be used in priority to pay off much of the national debt, which is one of the more costly areas of the annual budget and one which is paid out directly by the taxpayers. Using this money to expand government expenditures on education, transportation and other seemingly worthwhile causes shouldn’t be the first priority of our politicians.
Repaying past loans and decreasing the tax burden will insure that every Israeli enjoys the fruit of the gas discovery.
Tax Freedom Day doesn’t need to be viewed only as a source of dismay and frustration for us. It needs to serve as a wake-up call for our leaders that something must be done in order to quickly reverse a situation that is rapidly spiraling out of control.
The writer is the director of the Jerusalem Institute for Market Studies.