Companies will pay a lower rate of income tax in 2016 while “working poor” and old people will get more government assistance under plans Finance Minister Moshe Kahlon presented to the cabinet on Sunday.
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All three measures come amid unexpectedly high tax collections together with renewed debate over high levels of poverty, in the wake of last week’s annual National Insurance Institute poverty report showing a rise in the number of Israelis, notably working people, who are under the poverty line.
In October, the government approved a one percentage point drop in the value-added tax, to 17%.
The cabinet voted unanimously to approve a reduction of 1.5 percentage points in Israel’s corporate income tax rate, to 25%, starting January 1. The measure, which was approved by the Ministerial Committee for Legislation last week, will go to the Knesset for accelerated passage by the end of the year.
“We identified the existing corporate tax rate as a factor retarding economic growth in Israel. In light of the excess tax collections, we decided to take steps to reduce taxes and move the wheels of economic growth and enhance our competitive ability,” Kahlon said.
The cost of the tax cut will amount to about 1 billion shekels ($260 million), treasury officials said.
Meanwhile, Kahlon told the cabinet that so-called negative income tax payments to Israelis earning the lowest incomes would be increased by about 400 million shekels in 2015, which he said was made possible by the unexpectedly high tax collections so far this year.
The negative income tax, which is in effect a government grant, will go to working Israelis with disposable income of between 2,070 shekels and 6,800 shekels a month, the Finance Ministry said. Over the last three years, the average annual payment was 4,000 shekels to about 255,000 workers, it said.
Kahlon also said the government would use increase tax revenues to fund a 550-million-shekel increase in old-age allowances, working out to an extra 6,000 shekels annually starting in 2016. The increase is part of the coalition agreement between Kahlon’s Kulanu party and Prime Minister Benjamin Netanyahu’s Likud.
“We’re talking about another stage in the government’s war on poverty,” Kahlon said, saying the state had a dual policy in solving the problem through a growing economy and allocating help to those who need it.
The treasury said about 230,000 elderly people are eligible for the grant, most of whom rely on it as their sole source of income. Israelis have only been required to fund a pension plan in the last few years, leaving many without any retirement benefits.