A new study by Bank of Israel Research Department economist Dr. Adi Brender finds that “the average tax rate in Israel is lower than the prevalent rates in the developed countries for income levels that cover the vast majority of workers in Israel. The comparison shows that the average tax rate at low income levels is lower than in almost all the 26 OECD countries included in the comparison.”
Brender says, “In the past three years, the average tax rate on wages in Israel has fallen for most income levels, while in developed countries it has risen on average. As a result, the tax rate in Israel has become even lower than in the past in comparison to the levels prevalent in the developed countries.
“The average tax paid by workers on medium income levels in Israel - NIS 6,500-15,000 a month - which covers a third of all workers, has not fallen in the past three years, despite the reduction in statutory tax rates. This is due to the rise in wages in the economy, which has pushed workers into higher tax brackets. The average tax paid by married workers with a non-working partner, on these income levels, has even risen due to the cancellation of the tax credit for partners.
“For income levels up to 1.33 times per-capita GDP (about NIS 10,000 a month in Israel), which cover around 80% of all workers in Israel, the average tax rate is lower than in 17 of the 26 countries in the comparison with regard to fathers of two children, and lower than in almost every other country in the study (except for Japan, Portugal and South Korea) when comparing unmarried workers. For income levels of 1.33-4 times per-capita GDP (between NIS 10,000 and NIS 30,000 a month), which encompasses about 18% of workers in Israel, the average tax rate in Israel is similar to the median of those other countries. In contrast, for the 2% of workers at the highest levels of income, the tax rate in Israel is higher than in two thirds of the countries surveyed.”
Brender says, “The average tax rate in Israel is lower than in the EU countries at every income level. The tax system in Israel is more progressive than the norm in developed countries; the tax threshold is high and marginal tax rates rise abruptly at medium income levels, although at medium and high income levels the marginal tax rate in Israel is still not exceptional.”
Brender notes, however, “Tax benefits for parents, which are most significant at low income levels, are granted in Israel only via tax credits to the mother, unlike the practice in developed countries. As a result, 75% of families with children in Israel do not fully utilize their tax benefits, and two thirds do not utilize even part of their entitlements. In contrast, in the developed countries a large percentage of working parents enjoy substantial tax benefits.”
The calculation of tax rates includes income tax imposed by the government, National Insurance contributions paid by the worker and income taxes paid to local government and authorities in states where such taxes exist. The calculations were carried out for workers at eight levels of income, and for varying composition of households, taking into consideration exemptions and tax benefits in each country.
The comparison further shows that the income tax system in Israel differs from most developed countries, in that it barely considers the family status of the taxpayer. In almost every developed country (excepting Finland, Hungary, Poland, Turkey and Sweden) tax benefits to parents reach on average almost 10% of wages for low income earners. In Israel, in contrast, these benefits are granted only to working women, a practice not found in any of the countries in the study. As only 60% of mothers in Israel work, and of them only 56% reach the tax threshold after accounting personal tax credits, these benefits affect only one third of families with children. Furthermore, in only 70% of the families that enjoy the tax benefits, mostly families with one or two children, do the mothers reach income levels that allow them to fully utilize their entitlements. In other words, only one quarter of all families with children in Israel take full advantage of the tax benefits designed for them.
The characteristics of the tax system in Israel - high tax threshold and a relatively steep rise in marginal tax rates - encourage entry into the labor force, though they reduce the incentive to increase the level of employment and the investment of effort to improve wages, principally for the medium and high incomes, above NIS 10,000 a month. Workers at these income levels have also benefited less from the reductions in tax rates in recent years.
Published by Globes [online], Israel business news - www.globes.co.il - on May 8, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007