Independence Day for the Rich

If you are among the 20% richest people in Israel, you had good reason to celebrate Independence Day last week. You certainly can't grouse about the tax the state collects from you: it's been pretty good to you.

No, I am not being cynical. The maximum rate of tax that the State of Israel charges you, once the tax reform is completed in 2010, will be 44%. That alone should make you smile. The World Bank says that the parallel rate in the OECD countries is 46.75%. Marginal tax in the 15 richest OECD countries is 49.2%. As we said, you should be smiling.

But that's only half the story of your luck. In practice, the average rate of tax (not the marginal rate)  that you pay on your income in 2010 will be 35%.

And the state has more goodies for you. That 35% is misleading. It is the average that the state will take from your income, but your income needs to be re-examined. Do you think your average monthly income is NIS 30,000? Actually, it's NIS 36,000.You get another six thousand shekel a month without even noticing.

How's that? Simple. It doesn't go into your checking account, it goes into your pension or savings account.

In its generosity, the State of Israel allows employers to set aside, at their expense, all its provisions for your future, in training funds that are exempt from tax. That's applicable up to pay of NIS 15,000 a month. This amounts to extra income in your savings that the state doesn't even recognize.

The state is even kinder regarding pension provisions. Pension provisions up to monthly pay of NIS 29,200 are tax-exempt. Your employer's provisions for you are a tax-free gift.

Since you're in the top two deciles, it works out that you're getting NIS 6,000 a month tax-free. The effective average tax you'll be paying in 2010 is therefore 31%, among the lowest rates in the west.

So you had good reason to celebrate Israel's 58th birthday. You can't expect any more tax cuts. You got yours, which can't be said for the medium-range earners: they pay about the same tax as you do on far lower income, and they don't take advantage of their pension rights as thoroughly as you do.

Only one thing might dampen your joy: the Finance Ministry. It is usually suspected of pandering to the prosperous, but this time, it's looking at helping the rest of the population, at your expense.

Somebody over there calculated that pension and training fund benefits accrue to NIS 10 billion to NIS 13 billion a year (depending how you count). Somebody over there also noticed that the main beneficiaries of this gigantic tax break are you, the topmost 20%. You - people earning NIS 29,000  a month, four times the average wage; you who receive provisions into training funds while others have to settle for less sophisticated pension vehicles.

Somebody over there at the treasury calculated that if the ministry halves the tax break on pension and training funds it could save NIS 5 billion a year. That is money that could b used to help the aged live in dignity, even if they didn't exploit their pension rights as cleverly as you did.