Finance Chief’s Largesse: Which Israelis Will Benefit?

TheMarker takes a closer look at Moshe Kahlon’s plan to help the poor and middle class

Finance Minister Moshe Kahlon.
Moti Milrod

Finance Minister Moshe Kahlon unveiled a far-reaching plan Tuesday to cut import duties on consumer items, widen the negative-income-tax program, boost tax points for parents and subsidize after-school programs all in a bid to lower costs for middle-class families. The announcement got many Israelis wondering who would benefit and by how much.

TheMarker took a look at some of the most common questions.

Will it actually happen?

The answer revolves around “he who was not informed” Prime Minister Benjamin Netanyahu who wasn’t given a chance to share the spotlight for the proposal. Netanyahu will have a hard time opposing a popular move like this, but he has many ways to halt it.

Two of the proposals – negative income tax and extra income tax points for parents – must be done through legislation. The proposal to subsidize after-school care may also require legislation. While Netanyahu’s financial policy isn’t entirely clear, from a political point of view it’s doubtful he’d want the reform to succeed.

Who does it help?

Kahlon said the reform seeks to help working Israelis, but a closer look indicates that the childless, for example, won’t be getting much aside from cheaper shoes. As for the richest and poorest Israelis, the expansion of negative income tax will help the working poor, while the extra tax points will help middle-class parents who work. Most of the benefits will go to those between the third and eighth deciles; the second and ninth deciles will benefit a bit less, while the first and 10th deciles will hardly benefit at all.

Will the reform encourage Israelis to have more children?

Not directly, but it will make raising children more worthwhile for working people. Prof. Asher Blass notes that the reform will give money to people with young children, but only if they earn enough to receive the income-tax breaks granted by the extra tax points. “It’s interesting that the ultra-Orthodox parties support the reform,” he says.

Where will it pay to live?

The subsidies for after-school care will be based on the socioeconomic level of each municipality. Those in poorer towns will get greater subsidies. Thus people living in poorer neighborhoods of wealthy towns such as Tel Aviv’s Yad Eliahu will lose out, while those in wealthy neighborhoods of otherwise poor towns such as Jerusalem’s Rehavia will benefit. Blass calls this a problem.

“People living in Rehavia will get more money just because there are lots of poor people in Shoafat,” an Arab neighborhood in East Jerusalem, he says.

When does it start?

The reverse income tax and the extra income-tax points are supposed to be applied retroactively from the beginning of 2017, meaning employees may see an extra lump sum on their salaries when the changes are legislated. The subsidies for after-school-care programs are supposed to begin at the next school year. The cancellation of import duties and purchase taxes on baby clothes, cellphones and shoes is supposed to take effect in the next few weeks.

Who pays?

The state will pay in terms of lost revenue and increased costs. The extra tax points will reduce revenue by 1.7 billion shekels ($464 million), while the lost duties and taxes will cost some 600 million to 800 million shekels. The after-school care subsidy is due to cost 900 million shekels, and the negative income tax 750 million.

All told, this 4 billion shekels is supposed to come from the budgetary reserve as well as from higher-than-expected tax payments this year.

Had it not been for this reform, the money would most likely have gone toward the budget deficit, or been saved for another unexpected expense.