Israeli Tax Burden to Rise in 2014 for Fifth Year in a Row

Israelis have seen their tax burden climb over the last four years and will see it increase further in 2014, the State Revenue Administration said on Tuesday.

Taxes will probably soak up 23.9% of gross domestic product in 2013, up from 23.5% in 2012, the administration said in its 2011-2012 report. It projects the burden will jump another 1.1 percentage point to 24.6%, or 12 billion shekels ($3.5 billion), this year.

The rising tax burden marked a turnaround from the years 2003 to 2009 when the rate dropped, the report noted.

The administration estimated that tax benefits of various kinds had cost the government 44.9 billion shekels in lost revenues in 2013. That is equal to 19% of its total collection or 4.6% of GDP.

In 2014, the value of the benefits is projected to rise to 46.6 billion shekels, though it will fall to only 18% of total collections and 4.5% of GDP.

It said that if the tax benefits bestowed on companies and individuals were eliminated, the tax rate would be reduced by 15%. But the administration defended the principle of tax breaks, saying they were aimed at achieving social and economic goals.

The government came under fire for granting excessive tax breaks to many of the country’s biggest companies, under an amended version of the Law for Encouraging Capital Investments, and for offering a window last year to pay even lower rates on their so-called “trapped” profits, earnings that had been retained under the law rather than paid out as dividends.

On Tuesday, Finance Minister Yair Lapid vowed not to allow excessive tax breaks to be offered again under his watch.

“We’ve begun acting vis a vis the biggest companies in Israel by convincing them to pay taxes on their trapped profits and by raising the tax rate under the Law for Encouraging Capital Investments,” he said. “We will continue to work to ensure that tax benefits don’t turn into tax boondoggles.”

In fact, according to the revenue admiration’s report, Israel is not particularly generous in granting tax benefits. Israel’s rate of benefits – equal to 4.5% of GDP in 2013 and 2014 – is about average globally, and perhaps even somewhat below average. The reported noted that in Britain tax benefits amount to 12.6% of GDP.

The report also showed that big companies were not the only ones paying little or no tax. It said that in 2012, 52.3% of individuals were exempt from paying any income tax at all. That was up from 49.7% in 2012, but the administration said it expected the rate to decline again in 2014 to 47.1%.

Men earning up to 4.838 shekels a month and women earning 5,709 shekels are exempt from income tax, with the rate rising for those with dependents.

On the upper end of the income ladder, the wealthiest 17% of the population paid 76% of all direct taxes in 2011, including 84% of all income tax and 62% of all National Insurance and health tax payments. The top 10% of all income earners alone paid 40.1% of all direct taxes.

The top tax threshold in 2014 will be 39%, the highest since 2008, the administration said. The direct tax rate, mainly income tax, will rise to 22.4% in 2014 from 20.1% in 2008, it said.

With reporting by Eran Azran

Ofer Vaknin