An Anti-growth Tax

Raising the tax on labor is the worst mistake of all, especially in an economy where unemployment is rising.

When salaried employees receive their August paychecks in another two weeks, some of them will discover that they are paying much more income tax than before. Employers will also be paying more: Their national insurance payments have risen by 0.4 percentage points. In other words, the cost of labor in this country has just gone up. It is now more expensive to employ workers, and therefore less worthwhile to hire new ones.

These tax hikes are merely some of the many increases the government recently approved: Value-added tax was raised, and new levies were imposed on fuel, cigarettes and water. But raising the tax on labor is the worst mistake of all, especially in an economy where unemployment is rising.

For years, the economy had been going in the right direction - namely, lower taxes, especially on labor. Income tax was gradually reduced until the top marginal tax rate fell to 46 percent, and employers' national insurance payments were cut significantly. All this encouraged employment and growth.

But as of August, the top effective marginal tax rate will rise to an extremely high level of 58 percent. That is because the ceiling on national insurance and health tax payments has been raised. Until now, people paid national insurance and health tax only on their first NIS 38,415 of monthly income (five times the average wage). But as of August 1, the ceiling has risen to 10 times the average wage, or NIS 76,830 a month.

Granted, this is a tax hike that only affects the upper 10 percent of wage earners. But this is the group that contains the entrepreneurs, who create growth. This is the group that Israel wants to attract, not to drive away through excessive taxation. Currently, such people are trying to evade the extra taxes by changing their tax status from salaried employees to owners of private companies. That would also enable them to increase their tax-deductible expenses, meaning the Finance Ministry will get less money from them than it had planned.

It is well known that the best way to spur growth is to lower taxes in general, and taxes on labor in particular. But our government did the exact opposite. First it signed extremely expensive coalition agreements, then it bowed to pressure and refrained fr om cutting expenses. Finally it was left with no choice but to raise taxes so as to at least slightly decrease the hole it had created in the budget.

The economy is now apparently returning to modest growth. But had these mistakes been avoided, this growth would have been far more rapid, and employment would have been higher. Therefore, the government ought to rethink its tax policy and cancel these decrees as quickly as possible.