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The government on Monday embarked on a three-year program to fight poverty as Finance Minister Avraham Hirchson presented a plan to introduce a negative income tax and other social reforms as a means of boosting participation in the work force.
"Israel is in a better economic situation than it has been in for many years and now is the right time to work towards narrowing social gaps," Hirchson said as he presented the plan at a press conference in Jerusalem. "Work participation in Israel is significantly low compared to other open western countries. [Raising it] is the solution to poverty and on the basis of this guideline our program has been built."
The Finance Minister presented a five-point plan to be implemented by 2009, which will see the introduction of negative income tax, obligatory pension coverage for all workers and stronger enforcement of labor laws, such as adhering to the minimum wage and widening the subsidization of child care.
Offsetting the cuts in income tax revenues, Hirchson said the reforms would include raising taxes on company-owned cars.
The program is expected to cost NIS 1.2 billion annually, the Finance Ministry said, as subsidies for negative income tax will cost the government NIS 1b. per year while raising child care allowances for working mothers comes with a NIS 200 million annual price tag. The government expects to add NIS 2.5b. in tax revenues from the car reforms.
Government Budget Director Koby Haber said the cost would not affect the 2007 state budget.
The announcement follows the biennial poverty report issued last week by the National Insurance Institute, which showed that the number of children living below the poverty line stabilized for the first time since 1998, remaining unchanged in the 12 months beginning in July 2005, the last period measured.
It also comes as social issues once again top the national agenda after being short-changed in the 2007 budget, which was passed with an NIS 1.2b. increase in the defense budget in the wake of Summer war in Lebanon.
Negative income tax systems essentially subsidize low wages by giving different amounts of money to workers whose earnings are beneath a given salary threshold.
The Finance Ministry said it would introduce its program in stages starting in the second half of 2008 in Jerusalem, Sderot, Nazereth and Ein Mahel, affecting an estimated 35,000 households in the initial stage. This will increase to include 220,000 households countrywide when it is fully implemented by the end of 2009.
The benefits will be granted to workers earning a gross salary of between NIS 1,800 and NIS 5,800 per month. Wage-earners with up to two children will receive a grant of NIS 275 per month while those with three children and up will get NIS 400. The scheme also applies to households with two wage earners with a combined income of less than NIS 10,000.
In advocating the reforms in taxes on company cars, the ministry agreed to raise the use value of leased vehicles over three years by between NIS 1,140 per month for "Group 1" cars to NIS 3,870 per month for "Group 7" vehicles.
Raising the value of the company car, increases the taxed gross salary of higher income workers, Hirchson explained. At the same time, he said income tax will be lowered and people earning between NIS 4,270 to NIS 7,600 a month will have tax reduced from 17% to 13% by 2009, while those earning up to NIS 11,410 a month will have taxes reduced from 25% to 23%.
Meanwhile, as the program centered on encouraging people to go out and work, it drew criticism for ignoring certain sectors of society.
"The problem in the labor market is not the fact that people don't want to work but has to do with the fact that the work supply is not sufficient to provide work for everyone," said Roby Nathanson, chairman of the Macro-Center for Political Economics. "I would have liked to see more of a program to generate jobs, fortify the labor market through vocational training and support employers that promote these kinds of programs."
Nathanson added that the reforms left large segments of the economy unaccounted for and said people should not have to wait until 2009 for the benefits.
Similarly, Yehuda Talmon, president of Lahav, an organization acting in the interest of self-employed workers in Israel, said the reforms completely ignored self-employed and freelance workers who make up around 20% of the work force. Talmon said some 30% of self-employed households earn less than NIS 8,000 a month and that as many as 32% are below the poverty line.
Still, the significance of the program was widely recognized and is expected to have sparked a debate over its implementation and adoption.
"It is really not just another program, it's a serious structural reform that, if it is done as is proposed, will change the picture and initiate a debate that will occupy decision makers and professionals for a while," Nathanson said. "We will be very careful what we do now because whatever will be done in this field will affect the social and economic future of Israel for a long time."
How the reforms may affect you
How much extra tax will you pay if you have a company car in the Group 2 classification valued at around NIS 114,000 - the most common among company cars.?
The amount added to ones gross salary for using the car will increase from NIS 1,330 to NIS 2,770 a month by 2009, spread evenly with a NIS 480 monthly addition each year starting in 2007.
As a result, the net tax paid on one's salary will increase accordingly. Group 2 car users earning NIS 7,000 gross per month will pay further taxes of NIS 125 in 2007, NIS 222 in 2008 and NIS 266 in 2009. Those on a NIS 12,000 gross package will pay an additional NIS 190, NIS 324 and NIS 425, consecutively, over the next three years, while those earning NIS 20,000 will pay another NIS 195, NIS 343 and finally NIS 454 by 2009.
What if you don't have a company car, how will raising the car value and cuts in income tax affect you?
This group will profit from the reforms. Those earning NIS 6,000 a month gross will take home another NIS 17 a month this year in their net salary, which will increase to NIS 69 a month by 2009.
A gross package of NIS 10,000 a month means another NIS 33 in ones pocket this year, NIS 70 in 2008 and NIS 181 the following year.
Workers, without company cars, earning between NIS 12,000 and NIS 20,000 will bring home another NIS 33 a month this year, NIS 104 next and NIS 209 in 2009 and beyond.
(Provided by the Finance Ministry. See its Web site www.mof.gov.il for more questions and answers about the reforms and the ministry's full report.)