The cost of cancelling the plan to levy Value Added Tax on fruits and vegetables will take a toll mainly on the middle classes. The proposed tax amendments now necessary to make up for the shortfall in revenues, hurt mainly those who earn a monthly salary of NIS 8,200-NIS 17,600. Those who make NIS 18,000 or more are actually less affected.
Very high salary earners will pay a maximum income tax rate that is 1% higher than had been planned before the idea to tax fruits and vegetables was withdrawn. According to Finance Ministry figures, the maximum income tax rate in Israel is to be lowered by 1% (instead of 2%), so that those earning more than NIS 37,900 a month will pay income tax of up to 45% in 2010, instead of 44% as had been planned under the tax reform, and those earning more than NIS 17,600 will be similarly affected, and are set to pay up to 33% in income tax instead of 32%.
Paradoxically, mid-income earners will bear the brunt of the decision. Those earning a monthly salary of NIS 8,200-NIS 12,200 will pay income tax of 23% instead of 21%, as had been planned, and wage earners who make NIS 12,200- NIS 12,200 will have to pay up to 30%, instead of 27%, as originally planned.
But that's not the only blow in store for the middle class. By 2011, the difference between the plan and the new income tax schedule that has now become necessary, will grow to 3%. Only in 2016 will the tax reform get back on track.
The price to be paid by the middle class is, of course, a result of a constraint on the tax system laid down by Prime Minister Benjamin Netanyahu, who insisted that the maximum income tax applicable in Israel be lowered to 39% by the year 2016. To offset the expected loss of revenue that will result from lowering income tax on top salaries to 39%, the Tax Authority was forced to place more of the burden on mid-income earners.
Notably, low-wage earners will not be adversely affected by the continued waiver of VAT on fruits and vegetables. Rates for the two lowest income tax brackets will remain on track with the original reform plan, and drop 1% in 2010.
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