Kahlon’s New Tax Cuts for Israel Don’t Offer Any Significant Savings

Reductions would amount to under 1% of gross income for a typical tax-paying households.

Finance Minister Moshe Kahlon, March 30, 2016.
Ofer Vaknin

The tax cuts Finance Minister Moshe Kahlon plans for next year is focused on middle-income Israelis, but even those due for the biggest savings won’t end up with much extra spending money, figures released by the treasury Thursday showed.

A table of typical tax-paying households showed that the biggest savings would be for a couple grossing a combined 27,000 shekels (about $7,000) a month. Assuming they have no children and one breadwinner earns 15,000 shekels a month and the second 12,000, their combined savings would amount to 207 shekels a month, or 2,484 a year – about 0.8% of their gross income.

For a couple earning a combined 12,000 to 14,000 shekels a month, the tax savings would amount to 749 shekels a year.

For incomes above 20,000 shekels a month, the tax rate would rise, although not painfully, according to the tables.

For a childless couple earning 50,000 and 25,000 a month, their combined additional tax liability for the year would be just 199 shekels. At 115,000 a month – assuming one breadwinner grosses 80,000 shekels and the second 35,000 – the extra taxes would come to just 2,399 shekels for the year.

Kahlon, whose Kulanu party ran on a platform last year calling for relief for the middle and lower classes from the high cost of living, tax cuts have become one way he can deliver on campaign promises. An unexpected windfall in tax collections has enabled Kahlon to make further cuts without reducing spending.

His efforts to rein in soaring home prices have so far not yielded results, and a plan to make consumer credit earlier to access and cheaper has yet to go into effect.

Last year, Kahlon cut the value-added tax one percentage point to 17% and the corporate income tax rate to 25% from 26.5%. The current round of tax cuts calls for another corporate reduction as well – by one point each year in 2017 and 2018.

“Lowering taxes send an important message to individuals, companies and investors. Like last year, my policy is that any excess tax collections should be returned to the public and used to ease the tax burden imposed on it and strengthen the economy,” Kahlon said Thursday.

Kahlon and treasury planners may be counting on the tax cuts to keep consumer spending buoyant. With the stall in exports – the economy’s traditional growth driver – shopping has been what has been keeping the economy growing.

But economists have warned that the spending spree can’t continue indefinitely, and this week the treasury itself lowered its economic-growth outlook for 2016-2018.

“I’m confident that these steps, together with measures to encourage investment and the struggle against the high cost of living, will bring the Israeli economy back to the growth path,” Kahlon said.