"Since 1975, there hasn't been a reform in direct taxation that was actually executed," Finance Minister Silvan Shalom said yesterday referring to reforms proposed by Eitan Sheshinsky in 1988, Avraham Shochat in 1994, David Brodet in 1997, Ya'akov Ne'eman in 1999 and Avi Ben-Bassat in 2000. There was, however, one reform that was actually carried out. It happened in 1987 under the tutelage of Finance Minister Moshe Nissim and Income Tax Commissioner Yair Rabinowitz - the very same Rabinowitz whose committee published its recommendations for tax reforms yesterday. At the time, Nissim put himself on the line and sharply reduced income tax without levying any "compensatory" taxes on capital. He did so without a committee and without drawn-out discussions. His slogan, which in the meantime became his trademark, was "most of a man's work in his hands." Nissim cut taxes from 60 percent to 48 percent - immediately, without a transition period. Not only did the state's revenues not decline, they actually went up, because the increase in economic activity compensated for the fall in tax rates and tax evasion became less attractive.
The new tax rates lasted for about three years until Shimon Peres raised them to 50 percent, and recently, Shalom raised the overall marginal tax rate (income tax, national insurance payments and health tax) back to 60 percent as part of the emergency austerity plan passed by the Knesset last week. Now history is repeating itself. The very same Rabinowitz is recommending that marginal tax drop to 49 percent, a return to the days of "most of a man's work in his hands."
In principle, the reform is correct because it reduces the excessive tax on labor on the one hand, and taxes income from capital, which until now was exempt, on the other. After all, it is totally unreasonable that on a salary of NIS 10,400 a month, the marginal tax rate is 55 percent.
Shalom and Rabinowitz are not overly enthusiastic about taxing stock market gains and savings, and thus they proposed a relatively low rate of taxation on these channels. This will, of course, help them "sell" the plan to the public, to brokers and to the banks. The taxes they proposed are just over a half of those proposed by Shochat and Ben-Bassat. They wanted to impose a real tax of 25 percent, while the Shalom-Rabinowitz plan is for a 15 percent real tax. But the big difference between the two proposals is that the older plan involved a flat rate on all income from capital, while this time around, there are all sorts of different rates, so the basic goal of any reform - equalization of rates - has been missed. Therefore, the correct thing to do would be to impose a uniform nominal 10 percent tax on all capital channels, as is the case in the rest of the world. The burden of nominal taxation rises together with inflation, and it would therefore act as a stabilizing factor against inflation as pressures to restrain it would come from players on the capital market.
Opposition to the reforms is expected from the 700,000 households in Israel that do not pay tax at all. They will claim they don't stand to gain anything from the reduction of taxation of labor. But the reality is that 10 percent of the population pays 70 percent of taxes, so it is clear that if the tax burden is reduced, it will be those 10 percent that will benefit.
This is, in fact, the real aim of the reform: to benefit the working class - those with medium-to-high incomes between NIS 10,000 to NIS 35,000 a month. However, one must not forget that these workers also have savings, and therefore, in the final calculation, it is not at all clear whether they stand to gain or lose as a result of the reforms.
The general public does not want to see taxation of stock market gains or savings. After all, the Israeli dream is to buy a share and become a millionaire overnight when it soars by thousands of percent. On the other hand, everybody wants the treasury to reduce income tax, which really is too high. The Rabinowitz Committee had to maneuver through these limitations, and now what remains to be seen is whether Shalom will correct what needs to be corrected, whether the reforms make it through the Knesset and whether they are actually carried out.
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