The lower taxes endorsed by former finance minister Binyamin Netanyahu significantly helped the top earners, the Bank of Israel said in a report published Monday.
The tax reform enacted since 2003 was least advantageous for families with one earner, according to the report, which is part of the central bank's annual report for 2008 to be published next month.
"The structure of the tax system in Israel is increasing poverty levels among families with one earner, as the structure favors and encourages the entry of young people and mothers into the labor market through low tax levels for single earners and gender-related tax breaks," the report said.
Tax rates for young workers and women in Israel were much lower than tax levels in OECD countries, while in many developed countries, tax breaks are tailored to families, the report said.
As finance minister under Ariel Sharon from 2003 to 2005, Netanyahu cut income taxes, particularly for top earners. He also slashed government payments to large families. The tax and spending cuts helped lift the economy out of a recession.
The Bank of Israel recently said the cuts Netanyahu has vowed to put into place now might be less suitable this time because tax revenues are falling sharply.
Since implementation of tax reform in 2003, the tax rate for workers in the top third of salary earners has come down significantly, the report said. The average tax rate of married workers earning a monthly salary of NIS 16,000 has been reduced by 2.5 percentage points and for single earners by 4 points. For higher earners, tax rates have come down further.
Before the tax reform in 2003, the tax rate for top earners was higher in comparison with the majority of OECD countries. Following the reform, the tax rate became lower than in most of these countries, also because tax rates have barely been cut in developed countries in recent years.
The tax reform has not had a significant effect on the taxation of low earners because the tax rates were already low in comparison to international standards.
"As a result of the tax reforms, the structure of Israel's tax system has become less progressive than before; the tax rate rises less as the income of workers grows," the report said. "However, it is still more progressive than in other developed countries."