Finance Chief's Tax Cuts Will Benefit Israelis Earning Under $5,180 a Month

Moshe Kahlon's proposal awards the biggest savings to those taking in between $2,590 and $3,890.

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

Israelis earning 20,000 shekels ($5,180) a month or less will see their taxes fall starting next year while those earning more will face higher rates, under a proposal Finance Minister Moshe Kahlon presented to Prime Minister Benjamin Netanyahu late Tuesday.

The biggest beneficiaries would be those earning between 10,000 and 15,000 shekels a month, who would see their liability decline by 155 shekels. Those earning 15,000 to 20,000 would enjoy an 89-shekel-a-month reduction, while those in the 6,000-10,000 bracket would pay 65 shekels less. Those earning under 6,000 would pay 30 shekels less.

The lost government revenues would partly be made up by higher taxes for those earning more than 20,000 shekels. For example, someone earning 60,000 a month would pay 200 shekels more.

In addition, the highest marginal rate, which is now 48% plus a 2% surcharge, would apply to people earning 53,333 a month, instead of about 67,000 under the current regime.

Kahlon has been preparing a package of tax cuts for the 2017-18 budget, saying that unexpectedly strong growth in tax collections over the past two years justifies giving back some of the bonanza to households and businesses. The Kahlon plan also calls for a one-percentage-point reduction in Israel’s corporate tax next year and a further one-point cut in 2018, which would leave the rate at 23%.

Some treasury and Bank of Israel officials have expressed doubts about the cuts, warning that the big increase in tax revenues could prove transient and that the windfall should be used to pay down debt. Netanyahu has not publicly commented on the plan, which Kahlon crafted behind his back.

Concerns about the tax cuts were increased Monday by the Finance Ministry’s chief economist, Yoel Naveh, who downgraded his economic-growth outlook for the next three years. He said gross domestic product would probably expand 2.5% this year, down from a previous forecast of 2.8%.

The pace would pick up 2.7% in 2017 and 2.8% in 2018, but both figures were lower than his previous estimate.

“The downgrade is due to weakness in the world growth environment, which is seen in the continued erosion of global trade and a lowered growth outlook for the world’s leading economies,” Naveh said, adding that shocks such as Britain leaving the European Union were adding to the uncertainty.

Despite the lower growth outlook, Naveh said Israeli tax revenues were likely to be higher than expected. Already last year, receipts climbed 5.6% after inflation, double the pace of economic growth, and the trend is likely to continue into 2018.

Naveh, who had already revised tax-revenue projections higher, did it again Monday. For 2016 he said revenues would come in 4.6 billion shekels above his previous projection, reaching 282.5 billion shekels. In 2017 they would increase 2.9 billion more than his previous forecast to 290.1 billion, and in 2018 by 1.4 billion to 299.2 billion.

Kahlon told Netanyahu on Tuesday that his proposed tax cuts would deprive the treasury of 4 billion shekels in revenues next year and 4.8 billion in 2018.