Tax Reduction Plan Shot Down

Only days after announcing a grandiose, long-term tax reduction plan, the Finance Ministry appeared to be beating a retreat from many of the plan's provisions, as politicians and the Histradrut labor federation lined up to oppose it. Critics termed the plan "election-year economics, pandering to the wealthy" and predicted it stood little chance of being approved by the government or the Knesset. Finance Minister Ronnie Bar-On announced plans on June 11 to implement a gradual seven-year reduction of income tax rates, on both individuals and corporations, beginning next year. But the Finance Ministry was counting on financing the tax cuts by canceling current tax exemptions granted to employers' contributions to employees' "advanced-training funds." This move would bring 2.2 billion shekels a year in state revenue. The Histadrut - which vigorously opposes taxing the training funds, a popular perk among public sector and other workers - expressed anger at the fact that the Treasury was announcing a major tax exemption contravening collective bargaining agreements without consulting union leaders, and threatened a nationwide public sector strike in protest. The threat had its intended effect: Four days later, the Finance Ministry backed down, issuing a statement announcing it would enter talks with the Histadrut, which effectively means dropping cancellation of the training-fund tax exemption, and casts the entire tax reduction program into doubt. Bar-On's initiative called for across-the-board cuts in taxation rates, with the largest reductions going to those earning monthly salaries between 7,810 shekels ($2,200) and 11,720 shekels ($3,400), whose marginal tax rates would fall to 17 percent by 2015, compared with the present level of 26 percent. Corporate income taxes would decline to 20 percent by 2014, down from today's 27 percent. The lowest tax rate in 2015 would be 10 percent, and the top rate would be 42 percent, levied on those earning more than 36,760 shekels ($10,500) per month. The minimum taxable income would be raised from 4,253 shekels ($1,215) monthly today to 4,725 shekels ($1,350). Bar-On presented the program as tax relief for the middle class, which he described as "carrying the biggest tax burden and also the chief source of economic growth." He further claimed the plan would help close the gap between the wealthy and the poor and serve as an incentive to work and to invest. The plan would make the Israeli economy more competitive internationally, he argued, noting that the proposed tax reductions would make Israel's corporate tax rate in 2014 lower than the OECD average of 23.6 percent. But Labor Party Knesset Member Shelly Yacimovich sharply criticized the plan, claiming that it would "benefit only the upper deciles, increase social inequality and not help the working poor and the exploited" in Israeli society. Yacimovich told The Report via e-mail that members of both Labor and Shas on the Knesset Finance Committee intended to vote against the plan, which therefore "had no chance at all of passing." Avi Ben-Bassat, a Hebrew University economics professor and former director general of the Finance Ministry, agrees that the proposed tax-reduction plan was fundamentally regressive. "Under the plan, the higher one's income, the greater the tax reduction," he told The Report. "A person earning 5,000 shekels ($1,428) per month gets a 1 percent reduction, while one making 20,000 shekels ($5,714) benefits from a 5 percent tax cut." According to Ben-Bassat, who chaired a public committee for tax reform eight years ago, the main problem with Israel's taxation system is not the tax level, but its structure. "Israel's taxation level is already equal to the OECD average, and lower than the European average," he says. "But it needs to be fairer." Ben-Bassat praised the proposed tax on "advanced training" funds. These funds were originally meant to underwrite worker training and further education, but they have become general purpose, tax-exempt savings plans. "Today the main beneficiaries of the tax exemption are the top three income deciles. It and many other tax exemptions should be cancelled," he says. Ben-Bassat proposed canceling the exemption when he was Finance Ministry director general, but was unable to persuade the Histadrut to agree. "The Histadrut has always favored that regressive exemption, and I don't believe consulting with them ahead of time would have changed anything," he claims. "The Treasury would have been better advised to tackle Israel's public debt level, lowering it to OECD levels, rather than trying to lower taxes. That is the macroeconomic challenge we need to deal with today."