Last update - 00:00 28/01/2007
Treasury plan calls for mandatory pensions, lower income taxes
By Moti Bassok, Haaretz Correspondent
Finance Minister Abraham Hirchson will present the four major economic reforms that the government plans to institute in the coming few years at a press conference Monday morning in Jerusalem.
The four reforms include pension arrangements for all workers, increased taxes on vehicles that are provided to workers by employers, a negative income tax and lower tax rates for the middle class.
After eight months in office, Hirchson will try this morning to deflect criticism that he has been an indecisive finance minister who has brought about changes in the thinking of the treasury.
All four reforms will be introduced in stages, and will require cabinet and Knesset approval. The intention is to start implementing them during the second half of this year, with the rest of the process taking place at the beginning of, or during, 2008.
The timing of Hirchson's announcement is not a coincidence: It is aimed at creating a powerful "spin" that will distract the media - and public opinion - from the issues of government corruption, the problematic links between wealth and power, and the findings of the Winograd investigation into the Lebanon war, and at casting a more favorable social-welfare light on the cabinet and government in general.
The finance minister's success in initiating the revolutionary changes in pensions and negative income tax - in the face of traditional opposition from the treasury's professional echelon - testifies to the fact that something has changed in his ministry in recent months.
The treasury's initiative is also meant to show that there is no monopoly on supporting social welfare-related changes in the economy, and that such initiatives do not only belong to the head of the Labor Party, Amir Peretz.
The purpose of the reforms are to correct distortions in the economy and in society that have existed for years, if not decades.
The intention is to strengthen the lower classes, to protect their economic future and reduce the gaps in Israeli society. These are some of the most important reforms that have been proposed for the economy in years.
Most of the treasury's divisions participated in preparing the proposals, which will be presented before the cabinet next week before going on to the Knesset.
Mandatory pensions
The implementation of mandatory, global pensions for all workers is a major change. Other attempts to legislate such an arrangement have failed in the past. Indeed Hirchson himself, when serving as chairman of the Knesset Finance Committee, tried to pass such a law, but balked under pressure from then treasury minister Benjamin Netanyahu.
Such pensions would truly be a revolution: The state would require, by law, that every worker and employer put money aside for a pension together. For every shekel the worker saves, the employer would put in at least two.
Over one million workers have no pension arrangements today, and most of these lower paid employees will find themselves destitute when they reach retirement age.
Higher car taxes
The idea of raising taxes paid on cars provided by employers for their workers has been on the agenda for two years. Such employees will now pay much higher taxes on the car benefits they receive, which will likely be 2 to 2.5 times higher than the present level.
These changes will probably be implemented over a period of two or three years.
Estimates are that the first stage of the vehicle-usage tax reforms will bring in some NIS 1 billion in new tax revenues, and NIS 2.5 billion by the time the plan is completely instituted.
This money is meant to be returned to the public in two ways: through a negative income tax, and via lower income taxes from the entire public.
Of the 2.7 million salaried workers in the country, less than 10 percent - some 250,000 - enjoy employer-supplied vehicles. Most are middle- or upper-class wage earners, who to date pay very low, unrealistic taxes for this benefit.
The new tax tables for the vehicles will be presented Monday at the press conference.
Negative income tax
Institution of a negative income tax is the state's plan for helping the weaker sectors - those who earn very low wages, close to the minimum wage. It is specifically intended for those with salaries in the NIS 3,500-NIS 5,000 range.
Such workers do not pay income tax - indeed, over 50 percent of all Israelis that have jobs do not pay any income tax - and they have thus not received any benefits from tax reductions in recent years.
The negative income tax proposal states that these workers will receive a monthly grant of hundreds of shekels from the state, depending on their salary level, family size and economic situation.
At the same time, these workers will no longer be forced to make National Insurance Institute (NII) payments and will not pay the Health Tax - or will pay only a minimal part of it. These benefits will also be worth hundreds of shekels per worker.
The point of a negative income tax is to induce people to work, even at low-paying jobs, and not to live off government allowances. The Tax Authority would be responsible for the negative income tax plan, and not the NII. It would not necessarily require all salaried workers to file annual tax returns. It will also increase the number of authority employees by a few hundred.
Lower income taxes
Finally, according to Hirchson's plan, the tax increases from cars will lower income taxes for everybody, but in particular the middle class those earning from NIS 5,000-NIS 17,000 a month. Net salaries should rise by a few hundred shekels.
The new tax tables will also be presented Monday, and lower-level earners will see in them a larger reduction in their income taxes. However, all wage earners will essentially benefit from the lower rates - even those earning over NIS 60,000 a month.
Enforcing labor laws
The treasury will also announce Monday an additional NIS 20 million expenditure for enforcing labor laws, which will cover an additional 100 Ministry of Trade and Industry inspectors.
At Sunday's cabinet discussion on poverty, Defense Minister and Labor Chairman Amir Peretz said that a negative income tax would not necessarily transfer resources to the needy, but rather to employers.
Instead, he continued, raising the minimum wage - as he proposes - is the effective way to improve the lot of the workers and to reduce poverty.