Taxes make entrepreneurship less attractive

Jerusalem accountant says Trajtenberg recommendations had little economic value.

January 5, 2012 23:06
2 minute read.
Prof. Manuel Trajtenberg

Prof. Manuel Trajtenberg. (photo credit: Mark Neiman / GPO)


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Establishing a company is a less attractive option now that taxation reforms based on recommendations made in the Trajtenberg report have been implemented, according to a Jerusalem accountant specializing in corporate-tax services for English speakers.

The rate of taxation on corporations, investments (such as dividends and capital gains) and the top income bracket all rose under the new tax regime, which came into effect on Sunday.

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Jeff Broide of Broide & Co. Certified Public Accountants told The Jerusalem Post on Thursday that he would now advise high-earning clients such as dentists and lawyers against incorporating, because the increase in the investment tax and reduction in the national insurance ceiling mean it is cheaper to remain self-employed.

The tax on dividends for controlling shareholders (people with more than a 10% stake in a company) rose from 25% to 30% with the reforms. The national insurance ceiling for self-employed individuals dropped from nine times the average salary to five times the average salary, meaning any earnings in excess of NIS 41,850 a month are exempt from national and health insurance contributions.

Broide said the Trajtenberg report’s recommendations – which were issued in response to last summer’s wave of public protests over the cost of living – might have been valuable politically for the Netanyahu government, but they did not have so much value from an economic perspective.

“The last eight years in Israel have shown that when you drop tax [rates], your tax collections go up dramatically,” Broide said.

Furthermore, he said, the increase in the tax on investments from 20% to 25% (for those without a controlling share in a company) will hit the middle class, balancing out benefits they receive from extra tax credits for parents of small children and from a reduction in the middle-income bracket.

Tax for the fourth-highest income bracket, those earning NIS 8,881- 14,430 a month, dropped from 23% to 21% under the new tax regime. Income tax for the top bracket, those earning above NIS 41,830 per month, rose from 45% to 48%. Income tax for the second, third, fifth and sixth (lowest) brackets remained at previous levels.

Broide, who made aliya from South Africa 38 years ago, said now was also an important time for Israeli tax-payers to report to the Israel Tax Authority on all foreign assets and income. The authority’s voluntary disclosure program gives Israelis until June 30 to file a report, in return for immunity from criminal proceedings, waiver of penalties, interest and possibly linkage.

There appears to have been a very strong response to the amnesty so far, not just from Anglos – who “tend to be compliant” – but from the general population as well, Broide said.

“The amnesty is very efficient for the applicant,” he added.

“Although you will pay the taxes you would have paid [had you reported earlier], because there will be no criminal proceedings, no penalties for late payment and no interest, you will effectively be paying less than you would have, had you reported before.”

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