The warnings appear to have been accurate: Raising the wage ceiling on which national insurance and health taxes are levied not only didn't increase government revenue, it decreased tax receipts from the wealthy by a whopping 37 percent.
When this new regulation came into force in mid-2009, we heard warnings of precisely this scenario. The forecasts were based on experience and common sense. In 2002, the treasury tried increasing national insurance receipts by raising the wage ceiling, but receipts actually went down.
This was a mistake, then-finance minister Benjamin Netanyahu said in 2003, so he canceled the raising of the ceiling. But in 2009, Prime Minister Netanyahu apparently forgot what he learned, and Finance Minister Yuval Steinitz apparently refused to learn from experience altogether. The two repeated the mistake and raised the ceiling for national insurance and health tax from five times the average wage to 10 times, because nothing is more popular than taxing the rich.
As a result, Israel's effective marginal tax rate became among the highest in the world. It stands today at 57 percent for monthly wages between NIS 40,000 and NIS 80,000.
The treasury "experts" said in 2009 that raising the wage ceiling would increase receipts by NIS 900 million, but they didn't take into account a scenario in which many salaried employees would set themselves up as companies and avoid the new decree, because dividends are not hit by national insurance and health tax. And while you're setting up a company, you might as well increase deductible expenses on cars, overseas travel, training and the like. As a result, national insurance receipts actually dropped.
Steinitz tried to deter employees from setting up companies by promising that the raise was temporary and that we will be back to a five-fold ceiling as early as 2011. It turns out this was a false promise because the minister declared he intends to bring the ceiling down in stages over a few years. As a result, more salaried employees are expected to set up companies, and national insurance receipts will continue to drop.
Steinitz and Netanyahu must return to their senses, make good on their promise and bring back the five-times-the-average-wage ceiling for national insurance payments in 2011. Such a move would foster investment, growth and employment.
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