Disposable income to take a hit?
Disposable income to take a hit? Everybody needs to pay more tax, including the middle class, says Trajtenberg. Photo by Eyal Toueg
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Raising income tax rates by 1% for all taxpayers, as the Finance Ministry is considering, would bring in an additional NIS 2.65 billion a year. Out of this amount, about 40% would come from the lowest earning taxpayers, those making NIS 5,200 to NIS 8,900 a month gross, according to calculations conducted in the treasury.

Raising income tax rates is one of the steps the Finance Ministry is mulling in light of the need to close a NIS 12 billion gap between revenues and spending in the 2013 budget.

No decision has yet been made as to which taxes will be raised, and by how much.

Paradoxically, the lower the tax bracket, the more money that can be raised by increasing income tax rates. The reason is that there are many more people who earn low wages, and only a relative few people with very high salaries.

Raising income taxes in the low tax brackets will fall on all taxpayers except the very poorest, who already pay no income tax.

A 1% increase in taxes on those making NIS 5,200 to NIS 8,900 a month will bring in NIS 1.1 billion annually. The same increase for those making over NIS 41,800 a month will bring in only NIS 250 million a year, the treasury reports.

The state is missing some NIS 12 billion to NIS 14 billion in a combination of tax increases and spending cuts for next year's budget - just to meet the new budget deficit target approved on Sunday by the cabinet of 3% of annual GDP.

This will leave the government almost no choice but to raise taxes significantly, including on the middle and lower classes.

Prime Minister Benjamin Netanyahu's program of lowering taxes, starting when he was finance minister in 2003, lowered rates for everyone. Netanyahu's reforms lowered taxes significantly for the rich, but also broadened all tax brackets and brought down income taxes for lower wage earners, too - though by much less than for the rich. Now Netanyahu seems to have little choice but to reverse this process - at least partially - and raise taxes on both the rich and middle classes.

Nonetheless it is clear that the budgetary gap is too large to close only with income tax hikes, and other taxes will also have to rise. Under consideration are a corporate tax hike, which will necessarily have to accompany an income tax hike. A 1% increase in corporate taxes will bring in about NIS 750 million a year.

A 1% increase in VAT will bring in NIS 4 billion annually. The 2% tax surcharge on the very wealthy - those earning over NIS 83,000 a month - which is one of the recommendations of the Trajtenberg committee on socioeconomic change, would raise another NIS 400 million a year. The treasury's preference would be to cancel tax exemptions and credits, but this would have political repercussions.