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The tax cuts instituted by the government since 2003 have widened social gaps in Israel, the Finance Ministry concluded after a two-year study conducted in conjunction with external experts. The ministry is close to concluding a proposal for comprehensive reform of the Israeli tax system, based on which ministry officials hope to persuade Prime Minister Benjamin Netanyahu to halt his plan for further tax cuts.

The plan is the direct cause of Haim Shani's resignation Sunday from the post of director-general of the Finance Ministry. Shani was angry that after months of work on preparing the plan, Finance Minister Yuval Steinitz and Netanyahu chose to set up a panel of external experts to study how the plan would affect the middle class - while all along, Netanyahu has been the one to reject any attempts to change the structure of the tax system.

The ministry calculates that Netanyahu's plan to reduce corporate tax for companies and income tax for individuals will cost the state NIS 2.5 billion a year in lost income as of next year. Yet, at the same time, Israel is committed to reducing its deficit and debt. The two aims are incompatible, certainly if the prime minister now wants to increase the budget in order to appease the growing public protest. For instance, the government already decided to reduce tax on gasoline, despite the blow to state revenue from tax.

Netanyahu had planned to increase tax on gasoline by 40 agorot per liter in 2012. After the gasoline tax cut announced Sunday, to reach that same target, tax on gasoline will have to rise by 70 agorot per liter. The prime minister is also expected to retreat from intentions to slap tax on coal used to generate electricity, though the aim there had been green - to encourage the Israel Electric Corporation to use cleaner though more expensive fuels.

In short, tax revenue is likely to be NIS 2.5 billion short of the target in 2012.

The Finance Ministry therefore proposes to change the structure of tax levies - to increase direct taxation at the expense of indirect taxation and to stop the plan of reducing income tax from a maximum of 45% to 39%, and also to further lower corporate tax, from 24% to 18%.

Estate tax: Try, try again

Another element may be to increase National Insurance Institute provisions by employers. Social security provisioning in Israel is low, internationally speaking.

If anything the Finance Ministry is mulling an increase of corporate tax.

Capital gains tax, on profits from stock market trading, may be raised from 20% to 25%. The ministry is also considering the institution of estate tax (on inheritances greater than NIS 3 million in value ), which is the norm in the United States and the West in general. Prior attempts to introduce estate tax failed, it has to be said.

Netanyahu and Steinitz are expected to recognize daycare expenses as tax deductible, for children up to the age of 5. This would apply to lower and middle earners - though the Tax Authority has already firmly stated its opposition.

Another change the ministry is considering is tinkering with tax brackets, so the middle earners would pay less tax than today, increasing their disposable income by hundreds of shekels a month. Almost certainly, one or two new brackets would be added at the top, affecting the highest earners.

Meanwhile, however, value added tax may be lowered from 16% at present to 15.5% or even 15%. A cut of 0.5% would cost the state NIS 1.8 billion a year in lost income.

Sources at the Finance Ministry and Tax Authority say that this year, tax collection will be as planned for 2011, at best - NIS 213.5 billion.

Yet another move to help the general public is possibly lowering Customs duties on imported foods and durable goods such as household appliances and furniture. However, tax on imported cars won't be touched, and tax on buying expensive dwellings for investment purposes (not for living in ) will be increased.