We haven't had it so good in years, says FM
Hirchson's goal: Balancing correct economics and a correct society
Finance Minister Abraham Hirschson presented the four reforms the treasury plans in 2007-2009 at a press conference yesterday in Jerusalem:
Higher tax on company cars,
Tax credits for low earners
Lower income tax for everyone.
In addition, over three years the government will increase assistance for working mothers by adding a NIS 200 million annual subsidy to day-care centers. It will also increase the budget for enforcing labor laws by NIS 25 million.
Regarding company cars, this is how it works. When your employer allocates you a car, a certain amount of money is added to your gross salary for tax purposes. Naturally, you don't get a higher net income: you get use of the car. But your tax bill rises. The more valuable the car, the more is added to your gross pay each month.
Raising the value of using a company car will net the Tax Authority about NIS 1 billion during its first year (apparently 2007) and NIS 2.5 billion from 2009 onwards.
The entire amount will go to reducing income tax for the middle class - employees whose gross income is NIS 6,000-17,000. This will be done by altering the tax bracket ranges, Hirchson explained.
According to Hirschson, transferring state income from hiking the value of using company cars to the middle classes is "an equitable distribution of the burden. This is a far-reaching, socioeconomic move." Finance Committee members are expected to amend the treasury's suggested reform, so that taxation on larger vehicles will be greater and on "group 2" vehicles lower than proposed in the reform.
As of 2008 the state will have to bear the cost of instituting tax credits for the lowest earners. The cost should be about a billion shekels a year.
It will also budget NIS 200 billion for daycare, to encourage mothers to work.
Hirchson explained that his ideal is to balance correct economics and a correct society.
"A healthy economy cannot exist when part of the population does not benefit from its achievements," said Hirschson. "Israel is currently in the best condition it has been for years, and this is the time to act to reduce socioeconomic gaps, address taxation distortions and encourage employment. The reform will reduce gaps in society and strengthen it."
Referring to the latest poverty report, Hirchson said the growth trend in poverty was halted by the allowance policy.
Introducing mandatory pensions - forcing all workers to save for old age - is the most important socioeconomic reform.
Employees will allocate two or more shekels for every shekel coming from an employee's wages.
One million employees currently have no pension arrangement, and become a burden on the state when they reach pension age or live in poverty and destitution. The government, the Histadrut labor federation and employers will all be involved in negotiations for the mandatory pension law, which are to commence shortly.
"Negative income tax" is the government's plan to booster low earners. Employees who earn a pittance pay no income tax, and therefore benefited not at all from tax cuts in recent years.
Tax credit will be based on wage, the extent of employment, family size and economic status. The plan will be implemented in stages, starting in the second half of 2008, and will be in full operation in 2010.
Even before then, in 2007, the plan will partially implemented for 55,000 households.
Monthly income tax credit will total a few hundred shekels per person monthly. Anyone working half time or more will be granted a personal payment based on his or her salary, provided that the monthly family income does not exceed NIS 10,000, and the family does not own more than one residence.
Txa credits are designed to encourage low earners to work rather than subsist on welfare.
Cutting income tax
Revenue from company car taxation should decrease the overall tax burden, benefiting mainly the middle class, those with a gross monthly salary of NIS 6,000-17,000. Thus, someone whose gross monthly wage is NIS 6,000 will take home an additional NIS 17 every month, NIS 24 in 2008, and NIS 68 in 2009. A gross wage of NIS 10,000 will net an additional NIS 33 this year, NIS 90 in 2008 and NIS 180 in 2009.
The finance minister said the solution to poverty is work, and the four reforms were consolidated on this basis. As opposed to social security allowances, the negative income tax plan is a correct and effective method to encourage employment, since it increases the in-hand income of low wage earners by hundreds of shekels monthly.
"For the first time a dynamic model is being proposed, which creates a real incentive for the citizens of Israel to participate in the work force," Hirchson said.
To date, he said, opposition on the part of low wage earners, whose wage was insufficient for their needs, has constituted the main obstacle for realizing mandatory pensions. "Now, there is a practically one-time opportunity to implement mandatory employment pension in Israel." The reform will be carried out with the cooperation of Defense Minister Amir Peretz, acting chairman of the ministerial committee on this issue, Industry, Trade and Labor Minister Eli Yishai, Histadrut Chairman Ofer Eini and Chairman of the Office for Coordination of Economic Organizations Shraga Brosh.
According to the minister of finance, in order to solve the problem of working mothers, the treasury will budget NIS 200 million annually to subsidize day care for an additional 30,000 children. The state currently participates in financing day care for about 72,000 toddlers, at an average cost of NIS 700 monthly.
In response to the proposed reform, Uriel Lynn, president of the Federation of Israeli Chambers of Commerce Uriel Lynn, said, "The reform symbolizes a positive change in economic policy and enables a better distribution of the fruits of economic growth among all sectors of the population", adding that implementation of negative income tax need not come in place of increased minimum wage.