Treasury team to propose more tax reforms

A senior treasury team will this week submit initial recommendations for multiyear income tax reform to Finance Minister Benjamin Netanyahu.

Members of the team include Finance Ministry director general Joseph Bachar, Finance Ministry budgets director Kobi Haber and Israel Tax Authority director general Eitan Rub.

The recommendations will reportedly include lowering the corporate tax rate to 30 percent this year instead of waiting for 2007, the reduction of the VAT by 1 percent to 16 percent, and sweeping changes for capital gains tax on all types of assets - including real estate and other nonnegotiable assets.

Nonnegotiable assets are currently subject to a capital gains tax of 25 percent.

Sources say that the team will advise raising the tax rate on stock exchange capital gains, which are currently taxed at 10 or 15 percent, to bring it closer to the rate on nonnegotiable assets. If a change is made to the capital gains tax, it will constitute the third tax reform in two years after two Rabinowitz Committees fixed the capital gains tax on real estate and securities, both on and off the stock exchange.

The treasury team is focusing on three issues - the reduction of corporate rates, legislative amendments with regarding tax on individuals, and the capital gains tax. The changes are to take several years to implement.

The change in capital gains rates will affect all real gains from the sale of assets, including real estate (betterment tax), non-real estate assets that are held by an individual for personal use, business inventories and more.

The decision to reduce corporate taxes by 4 percent already this year, over and above the 1-percent reduction that took effect on January 1, would mean a drop of NIS 1.6 billion in 2005 state revenues, an additional fall-off of NIS 1.6 billion in 2006, and a further decrease to the tune of NIS 800 million in 2007.

Such steps would likely increase the deficit in the 2005 state budget beyond the planned 3.4 percent - unless the Tax Authority manages to up its revenues from taxes beyond the original target.

The treasury team is also reviewing other options to ease the tax burden on households. They, however, have no intention of recommending a further reduction in individual income tax rates, and will make do with the implementation of the final stage of the income tax reform recommended by the second Rabinowitz Committee that will go into effect on January 1, 2006.

A negative income tax, designed to help low wage earners, is unlikely to be adopted.

Instead, the team is likely to advise supporting low-income earners in other ways.

The team did not discuss possible tax relief on mortgage interest, deeming such a move to be too regressive.

Shlomo Maoz, head economist at Excellence Nessuah Securities, says that the economic plan in the works at the treasury is a positive one, but that it has no sources of funding. Maoz opposes upping the rates on capital gains.

"The Israeli public's sense of economic security has grown as a result of rises on the stock exchange, among other reasons," he says. "These rises yielded profits that were almost immediately translated into going away over the Passover holiday, increased consumption and more. Increasing these tax rates could shake the stock exchange and undermine the [public's] sense of security," he says.

	Joseph Bachar