BoI: Tax cuts boosted GDP

During the past decade, there has been a sharp drop in the rate of increase in real gross wages says Bank of Israel annual report.

By GLOBES
Money Shekels bills 521 (photo credit: Courtesy)
Money Shekels bills 521
(photo credit: Courtesy)
“The reduction in direct taxes on labor since 2004 has facilitated the growth in GDP per capita without an accompanying increase in gross wages and in parallel with an increase in net wages,” the Bank of Israel says in an excerpt from its 2010 Annual Report, which will be published on March 30.
During the past decade, there has been a sharp drop in the rate of increase in real gross wages, from 1.8 percent annually during the 1990s to 0.02% this decade, the report says.
“One of the possible explanations for the change in the trend of the average gross wage is the reduction in the tax rate on wages, which made it possible for wages to grow without an increase in cost to the employer,” the report says. “In 2003, the government decided on a long-term program to reduce the direct taxation of labor. In 2005, the implementation of the program was in fact accelerated, and in 2009 it was extended until 2016.
“A good approximation of the average tax rate on wages is the ratio of revenues from the income tax on wages to the total income of employees.
Thus, from 1995 until 2000, the average tax rate rose from 29% to 32%, and from 2001 until 2010 it declined sharply to 23%.”
The average real net wage per employee rose 0.7% between 2001 and 2010, which exceeds the average rate of increase in gross wages during that period.
“The reform to lower direct taxes on labor, which was initiated in 2003 and is expected to continue until 2017, has increased the Israeli economy’s ability to compete,” the report says. “The reduction in tax rates made it possible for net wages to rise without increasing production costs for the employer and increased the net wages of most of the workers who worked at least 10 months during the year, particular those with higher wages.”