Study: Israel's taxes becoming less progressive

Since the turn of the millennium, Israel's tax system has become less progressive, according to study by Van Leer Jerusalem Institute.

June 16, 2014 15:46
2 minute read.
An accountant [illustrative photo]

An accountant calculator taxes 370. (photo credit: Ivan Alvarado / Reuters)


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Since the turn of the millennium, Israel's tax system has become less progressive, putting a greater burden on the poor, according to a study by the Van Leer Jerusalem Institute released Monday.

The share of state revenues from progressive taxes such as income tax, national insurance tax, capital gains tax and car taxes, which generally tend to put a greater burden on the rich, have dropped 4 percentage points from 2000 to 2012, the study found. The share from regressive taxes such as Value-Added Tax, fuel tax, and cigarette and alcohol taxes, which tend to hit the poor harder in the pocket book, on the other hand, increased 7 percentage points.

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Progressive taxes in 2012 still accounted for 52.8% of tax revenues.

The researchers, Michel Strawczynski and Yarden Kedar, used data on government revenues from the progressive and regressive taxes to build an index for measuring overall tax "progressiveness." The index fell 26.5 percentage points from 2000 to 2014.

"This development reflects a consistent decline in ho much of the progressive taxes such as corporate tax, a steady rise in VAT, excise tax on gasoline, in the tax on cigarettes and alcohol."

To check whether poor people were, in fact, paying a greater portion of the taxes than before, the researchers assembled a Suits index of the Israeli tax system.

Like the well-known Gini index, which measure inequality from 0 to 1 based on how wealth is distributed, the Suits index measures the progressiveness of a tax from -1, indicating that the poor pay all the tax to +1, where the rich pay all the tax (0 means everyone pays a proportionate amount). The Suit Index they produced, which has a different methodology than that use by the Finance Ministry, saw a decline in progressiveness.

A weighted version of the index meant to more accurately capture its effects on the population found that from 2001 to 2009, the index dropped .161 to .143, indicating a drop in the progressive effect of taxes. From 2009 to 2011, the index recovered somewhat to .154.

One explanation the researchers offered is the fact that indirect taxes, which are generally more regressive, are often politically easier to adjust, so are more likely to be introduced during tough economic times when the government needs extra revenues.

Some business groups argue that lowering corporate or capital gains taxes ultimately helped the poor by spurring economic growth, while policymakers often increase alcohol and tobacco taxes to deter unhealthy behaviors that create social and health costs.

But the researchers pushed back against the idea that cutting progressive taxes has overall "trickle down" effects.

"The poor are worse off in several ways. They don't enjoy the fruits of the economic growth because of the change in the tax rate. With economic growth there is supposed to be increased income for everyone. You can see that didn't happen," Kedar said. While continued economic growth did mellow the effects of some of the tax policy changes, he said, the overall outcome was still worse for the poor.

The study excluded 14% of taxes taken into the government for methodological purposes.

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