They'll end up paying less
The public had grown used to paying the already very high marginal tax rate of 50 percent, but when Silvan Shalom broke the halfway mark and raised indirect taxes to illogical levels of 60-63 percent, the public wasn't willing to accept it.
If you happen to visit an accountant's office nowadays, you'll find that them preoccupied with registering new companies for members of the upper decile. This is an inevitable result of the huge mistake made by the finance minister when he decided to raise the marginal tax rate to an unreasonable level.
The public had grown used to paying the already very high marginal tax rate of 50 percent, but when Silvan Shalom broke the halfway mark and raised indirect taxes (National Insurance payments and the Health Tax) to illogical levels of 60-63 percent, the public wasn't willing to accept it. A quiet revolt began, with both the self-employed and salaried employees choosing to take on the status of companies, with the goal of reducing their tax burdens.
This week, the director of the National Insurance Institute, Yohanan Stasman, said that he feared NII collection would be lower than before the ceiling was lifted (in other words, before the indirect tax reached 60-63 percent), while at the Income Tax Authority, they are estimating that tax revenues will drop by NIS 200 million a year.
Accountant Yair Rabinovich, who is behind the tax reforms and has a good relationship with the finance minister, tried to persuade Shalom that this would be the result, but to no avail. Other experts and journalists also warned the minister that as a result of the raised ceiling, the rich would escape paying the extra tax and would end up paying less. But Shalom insisted. He had his political reasons - his desire to prove to the public that he was also digging into the pockets of the rich.
So, how do taxes go up, but the rich pay less? Because they have found three ways to get around it:
l Those who can, hide more of their income. And the reference here is primarily to free professionals and the self-employed, who simply evade a little more now. They refuse to be suckers who take home NIS 37 from every NIS 100 they earn.
l Those who can move their businesses or report their incomes abroad do so in countries where the tax is half that in Israel - for example, the United States. The result is that not only do tax revenues drop, but economic activity is affected and unemployment rises.
l But most are using tax planning. Thousands of self-employed, accountants, lawyers, doctors, carpenters, plumbers, and high-wage earners are changing their legal status vis a vis the authorities. Instead of being self-employed, or salaried, they become companies. As a result their taxes drop sharply - from 60-63 percent to 36 percent - and for the meanwhile, they leave the income in the companies.
But this is only the beginning of the story. The moment that a self-employed or salaried individual changes hats and becomes a company owner, his/her entire approach to taxation changes. As company owners, they can claim "expenses," some of which they could have claimed before, but never did.
They worked at home, but never declared any special expenses. But the minute they become a company, they can declare that one of the rooms in their home is an office, and then claim deductions on electricity, water and city taxes for the company.
They buy a book as a bar mitzvah present and ask the cashier to mark the receipt "professional literature." They buy food and call it a "business lunch." They buy a new dining room table and the carpenter's invoice says "office desk."
They go abroad; the ticket and all the other expenses are a "business trip." The new car is for the company. And when the son gets out of the army, he goes on the payroll, as a "worker." Thousands of shekels a month are saved this way - and the tax authorities see less and less going into their coffers. The results can be seen right now, in the drop in tax collection rates.
The problem is that even if Silvan Shalom understands his mistake and rolls back the indirect taxes to their previous levels, the damage has been done, because those who opened companies and see the advantage won't be in any hurry to close them. State revenues have been hurt, and will continue to be. But better late than never.
In other words, it would be better if Shalom admitted his mistake now and announce that on January 1, indirect taxes will roll back to the 50 percent level, when the NII and Health Tax ceilings were five times the average wage in the economy. At least that would put an end to the sudden surge in new company creation, tax revenues would increase, and economic activity would pick up.