Israel Mulls Higher Taxes for Highest Earners, to Fund Social Programs

Treasury, tax officials also considering increasing tax on interest payments, dividends and capital gains by 5 percent.

Zvi Zrahiya
Zvi Zrahiya
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Zvi Zrahiya
Zvi Zrahiya

The Finance Ministry is considering raising taxes on the highest earners in order to fund more social measures.

Finance Minister Yuval SteinitzCredit: Moti Milrod

This is one plan the treasury is examining as it searches for ways to increase the state's tax revenues. The extra money would be used to fund measures demanded by middle-class protesters and lower the burden on the middle class.

Treasury officials are considering introducing a so-called wealth tax by adding new income tax brackets for the highest earners. Treasury and tax officials are also considering increasing the tax on interest payments, dividends and capital gains by 5 percent. These taxes currently range from 15 percent to 25 percent.

The ministry is also reviewing a planned tax reduction that would favor the highest earners. This plan would nearly halve National Insurance Institute payments for top wage-earners.

NII contributions are calculated based on a percentage of monthly salaries, up until a cap. Currently that cap is NIS 72,000 a month; in 2012 it is scheduled to drop to about NIS 40,000 a month.

If the plan goes through, then people who earn more than NIS 40,000 will pay less social security.

In 2009, the cap on NII payments and health taxes was increased from five times the average salary to 10 times the average salary. This came after the cap was reduced in previous years. But NII figures show that after the increase, contributions by the highest earners declined 37 percent.

The NII believes this is because senior executives earning more than NIS 40,000 a month created private companies, and started receiving their salaries as dividends through these companies in order to avoid paying the higher taxes. Dividends are subject to a flat tax rate that is lower than the highest income tax brackets; they also are not subject to NII or health taxes.

The latest treasury proposal would increase taxes on dividends in addition to raising the income ceiling on NII and health taxes, thus closing that loophole.

Another avenue treasury officials are considering is halting planned cuts to corporate tax and income tax. In January 2012, corporate taxes are scheduled to be cut from 24 percent to 23 percent. The Finance Ministry is looking into canceling this cut, and raising corporate taxes by a few percent instead.

Currently, corporate taxes are supposed to drop 1 percent each year until 2016, until they reach 18 percent.

Economists at the Finance Ministry and the Tax Authority plan to submit these proposals to Finance Minister Yuval Steinitz and the Trajtenberg committee on socioeconomic change. Steinitz is believed not to oppose canceling the tax cuts.

Moshe Mizrahi, an accountant and attorney who until a few months ago was the Tax Authority's legal advisor, supports the proposals. "Taxes on capital gains and on dividends are too low, and they can definitely stand being raised by 5 percent," Mizrahi said.

"Increasing these tax rates will not make people flee and invest their money abroad, since this would not significantly improve their financial position. When it comes to capital gains and dividends taxation, the difference in taxation on active income (wages ) versus passive income (dividends and interest ) is not reasonable. The gap must be narrowed, but not in such a way that would destroy investments; rather, it needs to be done moderately that will keep us competitive internationally. A 5-percent increase in capital gains taxes will not have a significant effect on capital investments," Mizrahi said.