Employers split on negative income tax [pg. 18]

By DANIEL KENNEMER
October 31, 2006 21:22
4 minute read.

The Manufacturers Association of Israel on Tuesday called on the government to implement a negative income tax (NIT) system "as soon as possible," in stark contrast to the Federation of Israeli Chambers of Commerce's mid-month reiteration of its opposition to NIT. The Manufacturers said an NIT system would cut poverty and save the economy NIS 9 billion yearly, and expressed hope that practical steps would begin soon "so that we will be able to free up budget sources already in 2007." Negative income tax systems essentially subsidize low wages to encourage employment and reduce the number of working poor by giving different amounts of money to workers whose earnings are beneath a given salary threshold, such as NIS 5,000 monthly. Finance Minister Avraham Hirchson said he would unveil the Treasury's stand on NIT in the near future. Raising the minimum wage would cost the economy about NIS 17b. annually, more than double the cost of a negative income tax system, estimated by manufacturers association economists to be NIS 8b., the group said. "While negative income tax would go straight to the lowest wage earners only, raising the minimum wage would naturally have an influence on other employees and unintentionally lift the whole wage scale upward," the association explained. Federation of Israeli Chambers of Commerce President Uriel Lynn, however, declared on October 16 that implementing a negative income tax system would be a "most dangerous step" and essentially act as another form of welfare allowance. "This step, which depicts itself as a classic social step, is liable to be lamented for generations and weaken the will to go out to work," Lynn argued, advocating instead to limit reform to a tax reduction on low income workers only. Most of the money given through an NIT system would go to "individuals who are in any event participating in the labor market. Instead of going out to full-time work, it is liable to encourage going out to part-time work," he said. "We must not deepen and develop the [welfare] allowance culture in Israel, but rather aspire to [reach a situation in] which workers receive a fair wage and their net wage rises," he added. Lynn estimated that an NIT system would cost NIS 2b. to NIS 3b., "against a very small benefit for the state." The Bank of Israel reiterated its support for NIT on October 17, having concluded that such a system would have a positive - "even if small" - effect on employment, as opposed to other methods to alleviate poverty that reduce the incentive to work, countering Lynn's assertion to the contrary. "Experience from a number of countries that operated a negative income tax program shows that they contributed significantly to decreasing the number of pour among families with workers and to reducing the intensity of poverty among those that remained poor," the central bank said. An economic study indicated that bringing NIT to Israel would "significantly reduce poverty among working families" here as well, the Bank of Israel added. In order to have an NIT system ready for implementation in 2008, a decision must be taken "in the near future," the central bank said, adding that ideally such a system would concentrate on families with children and at least one breadwinner and would - "at least at the outset" - provide a yearly supplement based on the past year's income. Additionally, the supplement should be based on the higher income when both parents are working in order to prevent giving grants to low-income workers in high-income households - "which are the majority of low-income workers" - and to maintain the incentive of lower income earner to advance in his or her job, according to Bank of Israel economists. The supplements should be paid directly from the state to the worker - not through the employer - in order to prevent a drop in wage enabling the employer to pocket the subsidy for himself, international experience has shown. It would cost "a few tens of millions of [shekels]" annually to operate the required mechanism, including special assistance centers and advertisement, the central bank estimated. The NIT system would not require full disclosure of all income and assets, which the Israel Tax Authority is not equipped to handle, the Bank of Israel said, adding that there was no need to condition the supplement on an examination of income on capital since "there are very few families with children whose incomes from work are low and whose incomes from property are significant." There should also be a minimum threshold wage of NIS 1,000 monthly, the central bank said, advocating setting the maximum threshold at NIS 5,000 for families with one or two children and NIS 7,000 for those with three or more children. The maximum grants would come to NIS 500 per month for those earning NIS 3,500 with one or two children and NIS 900 for those earning NIS 4,000 with three or more children, according to the Bank of Israel's proposal.


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