1. After Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz were persuaded that there was no choice but to raise taxes, their moment of truth arrived: a decision about which taxes to raise. This question requires an immediate answer, and the public debate is heading in that direction. In the best tradition, populist proposals are percolating to the surface which sound wonderful, but which will cause further damage, or will miss their objective.
It is already important to make clear: raising VAT, the main indirect tax, by 1 percentage point is a fait accompli, and Netanyahu and Steinitz had better implement it as soon as possible, in order to top up the state’s dwindling coffers now, and minimize future tax hikes. The only problem is that this tax hike is not enough (generating about NIS 4 billion of the at least NIS 12 billion needed), so there is no choice but to raise direct taxes.
2. One proposal coming from the social protest leaders, and which has the support of quite a few MKs: raise taxes on the rich. The proposal is just, but impossible to implement. According to Ministry of Finance figures, raising the income tax on the top income bracket (people earning more than NIS 42,000 a month) by 1 percentage point, will generate NIS 180 million at best.
Therefore, if the Ministry of Finance needs to raise at least NIS 4 billion in direct taxes, it will have to raise the tax rate for this bracket by 20 percentage points. This would quickly bring the marginal tax rate (income tax, plus health tax, plus national insurance levies) to 80%, wiping out disposable income and eliminating demand (and the economy), and the actual tax collection will be close to zero (tax planning and avoidance).
There is a similar idea, called the surtax (a tax on people who earn more than NIS 2 million a year from capital and labor combined), which is supposed to generate NIS 200-400 million in revenues a year. In this case, it would be necessary to levy a tax rate of 20%, not the 2% proposed by the Trajtenberg Committee, to cover part of the hole – a situation that is wholly undesirable. Therefore, the proposal is just, but far from sufficient…Read More>>