Is Israel a high tax country? New OECD tax data suggests otherwise. Israel joined the OECD in 2010.
The average tax-to-GDP ratio in OECD countries was 34.2% in 2017. Israel compares favorably with tax-to-GDP of only 32.7% that year.
Between 2016 and 2017, the largest tax ratio increases were in Israel and the United States.
Israel introduced a number of policy changes that impacted revenues from taxes on income and profits, which together contributed to an increase in its tax-to-GDP by 1.4 points from 31.3% in 2016 to 32.7% in 2017. These policy changes apparently included a reduced basic tax credit for personal income tax, increased employer national insurance contributions, and changes to corporate taxation.
The tax-to-GDP ratio in the USA increased by 1.3 points (from 25.9% in 2016 to 27.1% in 2017), partly due to the one-off deemed repatriation tax on foreign earnings under the Tax Cuts and Jobs Act.
In 2017, France had the highest tax-to-GDP ratio in the OECD in 2017 (46.2%), which may partly explain the current wave of yellow vest demonstrations against the French cost of living.
How does Israel compare with other countries?
Israel’s tax-to-GDP of 32.7% in 2017 is better than in Germany (37.5%), Greece (39.4%), Italy (42.4%), the Netherlands (38.8%) and the UK (33.3%).
Israel’s tax-to-GDP in 2017 was worse than in Canada (32.1%), Korea (26.9%), New Zealand (32.0%), Australia (27.8% in 2016), Switzerland (28.5%) and the US (27.1%)
Between 1965 and 2016, the average tax-to-GDP ratio in the OECD area increased from 24.9% to 34.0%.
Import taxes have dropped over the years due to a global trend to remove trade barriers. Instead there is a trend towards VAT, which is now imposed in 35 out of the 36 OECD member countries – but not in the US.
Between 2015 and 2016, the key changes in the tax-to-GDP ratio in the OECD were increases in revenues from sales or VAT taxes as well as from social security.
Tax mix in Israel versus the OECD:
Governments collect a variety of taxes. The latest OECD tax mix data relates to 2016.
The government’s biggest money spinner is VAT. VAT accounted for 24.1% of tax revenues in Israel, well above the OECD average (20.2%), as well as the UK (20.8%) and Australia (a miniscule 12.9%).
Income tax on individuals accounted for 19.8% of tax revenues in Israel, below the OECD average (23.8%).
Social security contributions accounted for 16.6%% of tax revenues in Israel, well below the OECD average (26.2%). The highest rates were in the Slovak Republic and the Czech Republic (43.5% and 42.9%, respectively). In contrast, Australia and New Zealand do not levy social security contributions.
Non-VAT taxes on consumption (e.g. import taxes especially on cars, customs duty, purchase tax) accounted for 13.7% of tax revenues in Israel, slightly above the OECD average (12.5%).
Taxes on property accounted for 10.3% of tax revenues in Israel, well above the OECD average (5.7%). Israel fared better than the UK (12.6%) and Canada (12.0%).
Income tax on companies accounted for only 9.9 % of tax revenues in Israel, very slightly above the OECD average (9.0%).
Other Israeli taxes accounted for 5.6% of tax revenues, above the OECD average (2.6%)
Which government level collects those taxes?
Some countries have state or provincial taxes. For example, in the US in 2016, 42.1% of tax revenues were federal, 19.4% were state taxes, 14.5% were local taxes and 24% were from social security.
In Israel in 2016, 75.5% of revenues were collected by the central government, 7.9% by municipalities, 16.6% were from social security. The UK is very similar to Israel in this respect.
Summing up Israel:
Israel emerges better than average in the OECD tax league tables. But the OECD does not explain the increase in Israeli tax revenues between 2016 and 2017. Is the OECD referring to the Mediterranean gas levy? Or to higher prepayments of business taxes, some of which were excessive and had to be refunded in 2018?
Israel is no longer a high tax pariah state. But there is bureaucracy. In the latest World Bank survey on ease of doing business in 190 countries, Israel is ranked 90th on the tax side.
As always, consult experienced tax advisors in each country at an early stage in specific cases.The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
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