We have witnessed the Arab Spring, and we now seem to have a mild Israeli Summer
– demonstrators encamped in a number of cities to protest about the living
costs, wealthy tycoons and…taxes.
Israeli government policy
The Israeli tax system is said to be
regressive. In other words, the rich and poor alike pay similar taxes on
spending, and the rich don’t pay enough tax on income and capital gains. How
true is that?
In 2003 Israel embarked on a program to
reduce the direct tax rates, on income and capital gains, by tightening
enforcement and reducing some of the tax breaks. Consequently, the top rate of
income tax has decreased from 50 percent to 45%. The regular rate of company tax
has decreased from 36% to 24%. Even VAT decreased from 18% in 2002 to 16% by
2010.The overall tax burden
Israel joined the Organization of Economic
Cooperation and Development (OECD) in 2010, and it is customary for a country to
benchmark itself against other OECD members. According to the OECD, total
Israeli tax revenue as a percentage of gross domestic product (GDP) was 31.4% in
2009, compared with 31.1% in Canada, 34.3% in the UK, 37% in France but only 24%
in the US (no wonder the US reached its debt ceiling).
The OECD average
in recent years has cruised at around 34%. So it seems the overall tax burden in
Israel is better than the international average but not as good (or as bad) as
Where do those taxes come from?
According to the OECD, Israel
gets its taxes from:
• income and profits – about 11% of GDP (OECD average
• social security – about 5% of GDP (OECD average 9%);
• property –
about 3% of GDP (OECD average 5.4%);
• goods and services – i.e., VAT and import
taxes, about 12.5% of GDP (OECD average 10.8%).
So the goods and services
tax is higher than the OECD average, and other taxes are a bit lower. But the
current Israeli VAT rate of 16% compares well with the OECD average of about
18%. Presumably Israeli import taxes don’t compare so well.
What does the
government do with all that money?
Israeli government expenditure totaled NIS
303 million in 2010, according to Israeli government statistics. Of this 18%
went on salaries, 18% went on goods and services, 9% on interest, 22% on grants
and subsidies, 25% on social benefits and 8% on other expenses.
we spend our money on?
According to government statistics, private-housing
expenditure rose from NIS 93 billion in 2009 to NIS 99b. in 2010. The increase
was entirely due to increased spending on home ownership, which accounts for
about two-thirds of the total. The other one-third goes on rent, city taxes and
Likewise, private fuel consumption rose from NIS 32b. in 2009
to NIS 37b. in 2010. The increase was entirely due to increased spending on
transportation and heating fuel, which accounts for about 60% of the
Food, beverages and alcohol consumption rose from NIS 82b. to NIS
88b., spread among many different subcategories.
The rate of inflation in
2010, according to the consumer price index, was only 2.7%.
government change course?
We will leave the politics to the politicians.
Fiscally, it seems that the regular Israeli VAT rate of 16% isn’t so bad by
international standards. However, unlike Israel, some other countries
have a reduced VAT rate for foodstuffs; for example, 6% in Belgium and the
Netherlands, 7% in Germany, 5.5% in France, 0% in the UK.
and limitations apply in most cases. For example, in the UK, food and drink is,
in general, zero-rated, but many items are liable to 20% VAT, including
alcoholic drinks, confectionery, potato chips and savory snacks, food for
catering or hot takeout, ice cream, soft drinks and mineral water.
the top rate of personal income tax in Israel be raised beyond 45%? If you add
National Insurance Institute payments, personal tax rates already approach 57%
in practice. This drives successful Israeli business people toward using
companies to restrict the tax burden on distributed profits (company and
dividend taxes) to 43%.
In the UK, the recent increase in the top rate of
income tax from 40% to 50% was expected to encourage immigration to Europe and
even aliya to Israel. But recent press reports indicate that few have emigrated
from the UK so far, mainly due to the inconvenience factor.
government has unwittingly contributed to this in a small way by granting olim
(from the UK and elsewhere) a 10-year Israeli tax exemption for foreign source
income and gains, but not income from work done in Israel.
What do we
If the social-justice demonstrations continue in Israel, don’t be
surprised if proposals emerge for a VAT reduction on food, financed by a hike in
income taxation... and if the demonstrations fizzle out, expect nothing. But our
crystal ball may not be infallible. What do you think?
As always, consult
experienced professional advisers in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.