The Rich Had a Party – and Now the Middle Class is to Foot the Bill

The middle class is now being asked to foot the bill for the tax cuts that high earners enjoyed over the last decade.

1. The income tax proposals that the Cabinet is to table for Knesset approval on Wednesday are described in terms of “There is no free lunch.” However, if truth be told, the middle class is now being asked to foot the bill for the tax cuts that high earners enjoyed over the last decade.

The tax cuts introduced in 2003 decreased the state’s tax revenues by a cumulative total of more than NIS 40 billion. The main beneficiaries were salaried persons in the top income bracket, 80% of them men. The proposal to increase income taxes for persons earning the average wage and up by one percent will affect, among others salaried women and men who derived very little benefit from the above tax cuts. It would be preferable to limit the tax increases to persons earning more – for example, three times the average wage (about NIS 26,600) — and to increase their tax rate by more than one percent.

2. The imposition of a special 2% tax increase on salaries exceeding NIS 800,000 per year is a positive step, but it would be preferable to impose a higher increase on very high earners, in view of the fact that over the last decade senior corporate executives saw their salaries grow by more than 250%.

3. In contrast, it would be preferable not to increase VAT, as today state revenues from indirect taxes, first and foremost VAT, are higher than revenues from direct taxes. They are also high in comparison to the revenues of other OECD countries from indirect taxes (which are regressive). Moreover, increasing VAT will have a negative effect on the majority of Israelis – about three-fourths – who earn less than the average wage. Among the latter, women are especially prominent, as more than one-third of salaried women are low wage earners (low wages being defined as up to two-thirds of the median wage [median wage is approximately NIS 6000]).

4. Especially disturbing is the willingness of the Minister of Finance to forego collecting taxes on gains of international corporations not transferred abroad — against the background of media reports that Israel’s largest corporations are exempt from paying the full corporate tax. Were the Finance Ministry to double the tax on such gains, it might be able to avoid increasing VAT.

5. The across-the-board cuts that the Cabinet is expected to approve for most of the government ministries will further reduce the social services available to Israelis. Especially hard hit will be health services, which women utilize more than men. It should be borne in mind that the out-of-pocket costs of Israel’s social services were one of the main reasons for last year’s social protest. Furthermore, the cuts will have the greatest effect on women, who occupy the majority of civil service positions. As such, it is their jobs, salaries and working conditions that will suffer the most.