BoI: Negative income tax could lift some out of poverty

Some 2300 families would benefit from extension of program.

Sweat shop workers-311 (photo credit: Courtesy)
Sweat shop workers-311
(photo credit: Courtesy)
The Bank of Israel is urging the government to expand the negative income tax credit pilot program nationwide and increase the size of the credit as a way to help the working poor and reduce poverty.
“The program is an effective tool that raises the level of income of the working lowpaid population,” stated the Bank of Israel report.
“It helped to rescue about 4.5 percent, or 540 families of the credit recipients from poverty, it reduced the depth of poverty, expressed in terms of the poverty gap, by about 5%, and boosted the income of the bottom quintile of the recipients by some 12%.”
The Bank of Israel published the findings following the first year of the implementation of the Earned Income Tax Credit (EITC), or negative income tax program, which was launched in September 2008 in four places.
It was introduced on an experimental basis in areas where the “Lights to Employment” program was operating – Ashkelon, Hadera, Jerusalem and Nazareth.
The report was prepared by a research team monitoring the implementation of the pilot program that comprised representatives of the Bank of Israel, the Myers-JDC-Brookdale Institute, the National Insurance Institute, and the Israel Tax Authority.
The program aims to increase the income of lowwage earners in families with low income and to encourage individuals with low earning potential to enter the labor market. In the first year of the program, out of the 68,000 eligible for the negative income tax grant, 28,800 or 45% participated.
Individual participants received an average of NIS 2,560 in the year, and families with two eligible working members received NIS 4,900 on average. About 80% of the support transferred to families with children went to the lowest four deciles of the wage scale. Total grants received amounted to NIS 74 million.
“The rates of take-up were high by international standards, taking into account the fact that the program is still in its early stages and is operating on a more modest scale in Israel than in other countries,” stated the report.
According to the initial findings, the program is more effective in reducing the incidence and depth of poverty among families with children than among those aged 55 and above.
“The credit also helps to improve the income of working families with income slightly above the poverty line. The report also shows a decline, among recipients of the credit, of those who had to give up essential services such as visits to the dentist and of those whose telephones or electricity were cut off,” stated the report.
“In light of the problem of poverty among families with one wage earner and widening income gaps, and based on experience gained hitherto, the findings support the extension of the EITC program nationwide.
“Furthermore, increasing the size of the credit, when the budget so allows, could contribute to the reduction of poverty among working families by means of an effective and focused tool that does not have negative side effects on incentives to join the labor force.”
A nationwide extension of the program would help lift 2,300 families out of the poverty trap, according to estimates by the central bank.
“Although it is too soon to assess the effect of the program on rates of employment, based on international experience it may confidently be expected that such effect will not be significant,” stated the report. “Nonetheless, unlike other policy tools, EITC is not expected to have a negative impact on rates of employment.”
Meanwhile, the Finance Ministry, although in support of the program, has in recent months raised some concern over expanding the negative income tax credits program on the grounds that its implementation, supervision and enforcement are very complicated and time and cost-intensive.
“The negative income tax credit program should be expanded nationwide, but it needs to be instated together with a program for the integration of pension benefits at work, since both measures are connected to one another and their overall impact will help advance employment among the weak populations,” the Finance Ministry said, in response to the central bank’s study.