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
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
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
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
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
This has little current consumption value to Israelis.
order to cover past governments’ overdraft, Israelis have to work 69 days a
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
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
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.
discourages work, tax on capital gain reduces savings and investment and
corporate tax decreases foreign investment and company formation.
the government may suffer from a high tax rate, as the Laffer curve
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.
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.