In the madness of the markets, here and elsewhere, hired managers of large companies earn tens of millions of shekels a year. That is insane, given that hired help aren't undertaking any risk, so they shouldn't be compensated that richly. The rule in economics is that reward is supposed to be a function of risk. So to get rich, you're supposed to take a risk and open a company.
Therefore, leaving aside the capital market anomaly, the rich are the self-employed - everywhere in the world, and here too. Tax Authority figures show that the more successful self-employed do reach considerable figures. In 2010, the top 1% of self-employed earned NIS 452,000 a month, or NIS 5.4 million a year. That is 4,500 people with businesses of their own.
Here are some more interesting figures: The income of that 1% is 6.5 times the income of the top 1% of hired workers, which makes sense based on that risk-reward tenet. Secondly, their income is 25 times the average income of all self-employed in Israel.
Among people on salary, the top 1% earns just nine times the average. In other words, income inequality is focused largely on the self-employed.
The third point: The income of the top 1% of self-employed was 44% higher last year than in 2009. Yes, they upped their income 44% inside one year. What happened between 2009 and 2010 that caused that huge jump? Hint: Look at share prices and home prices in those two years.
Which brings us to the fourth and most interesting point - tax: The average tax rate among Israelis is 20.5% of their income. The uppermost 1% of salaried workers, the ones grossing NIS 69,000 a month, pay 40% of their income on average. But the uppermost 1% of self-employed, the ones grossing NIS 425,000 a month, pay just 26%.
Yes, the richest people in Israel pay the least tax. For comparison, that top 1% pays less tax than the uppermost 10% and the 90th percentile of self-employed.
The 80th percentile grosses NIS 17,500 a month, one 25th of the uppermost 1%, but pay about the same tax rate.
How could that be? Hint: Look at share prices and home prices.
According to statistics from the Tax Authority, which sadly only has figures as of 2007, the uppermost 1% of self-employed differs from the rest of the pack in the breakdown of their income.
How they make their money: Not like you
While the rest make their main living from a salary (employee ) or work (self-employed ), with the uppermost 1% of "self-employed", only 31% of their income comes from pay. The rest is gains - 19% from rental income, dividends or interest payments, and 47% from capital gains. In other words, 66% of their income derives from assets and capital.
There you have it: The uppermost 1% is rich in assets. Therefore, 66% of their income derives from physical or financial assets - capital. Ergo, in Israel it is capital on which tax is lowest.
Dividends, interest payments and capital gains are taxed at a rate of 20-25%. The tax on property is zero (no betterment tax for investors ) to 10% (tax on rental income ). Meanwhile, tax on labor is 45%.
Ergo, the richer a person is and the more assets he has, the less his tax rate. Earn the most, pay the least tax.
It isn't a stretch for proponents of greater equality in Israel to call for higher tax on assets and capital. Netanyahu's legislative proposal, which would abolished the betterment tax break on properties bought for investment, is before the Knesset, which is tending to junk it for fear that without property investors, rental costs will rise.
Meaning, the temporary stress of the housing problem is causing the Knesset to ignore a long-term greater good that would improve equality in Israel.
While on the subject, the legislators should reexamine the tax rate on capital. This is a step that needs careful consideration and execution: Capital, especially big money, is a very global flow. Israel can't afford to overdo tax on capital compared with other developed nations, lest it trigger a great capital outflow. Nevertheless, some degree of correction is called for.
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