Richest Earn Mostly From Investing, Thus Pay Low Taxes

MK Zahava Gal-On of Meretz says report proves investment income should be taxed more in order to reduce social gaps.

Ninety percent of citizens earn most of their income from labor, while the richest citizens' income derives mostly from investments, which are taxed at much lower rates than labor, found a new report by the Knesset Research and Information Center.

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MK Zahava Gal-On - Tomer Appelbaum - 21082011
Tomer Appelbaum

The bottom nine deciles - meaning, 90% of the population, from the poorest through the upper middle class - earn more than 90% of their total income from labor. The remainder is investment income.

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For the top decile, however, the picture is entirely different - the richest 10% of the population earns 58% of its income from labor and the remaining 42% from investments, such as capital returns on assets including stock.

The figures become even starker for CEOs and the self-employed in the top percentile - the country's richest 1% earn 31% of their income from labor, and a full 69% from investments.

The report was conducted by economist Ami Zadik at the behest of MK Zahava Gal-On (Meretz ), who said the results proved that investment income needs to be more heavily taxed in order to reduce social gaps.

Zadik based the report on 2007 data from the Finance Ministry's State Revenue Division. The data includes figures from business owners and the self-employed. He noted that income from labor - salaries and pension money - is taxed rather heavily, including income tax, National Insurance tax and health tax. Together, these taxes can equal 57% of a person's income.

However, investment income is generally taxed at a much lower bracket. For instance, the tax on capital gains, interest and dividends is only 20% to 25%.

The research found that employees earned 91% of their income from labor, and the remainder from investments. For CEOs and the self-employed, the figure was 76%, with the remaining 24% coming from investments.

"Given the data on how income is divided between labor and investments, we could consider making the taxes on these two types of income more equal," said Gal-On.

She called on the Trajtenberg committee, which is evaluating the government's socioeconomic policy, to consider three options: immediately raising the capital gains tax to 30% or 35%; instituting a differential capital gains tax, based on the size of the capital gains, much like income tax is differential; or adopting the American model, which calculates capital gains as part of a person's income and levies income tax on the whole figure.

"Social justice begins with a progressive tax system, which helps reduce inequality. Currently, the richest citizens pay much less tax on their income than the middle class does - and thus the government is only increasing social gaps, which are already large," said Gal-On.

"The report's findings show just how distorted Israel's tax structure is. The lower classes and the middle classes earn their income almost entirely from labor, and they pay income tax, National Insurance and health tax that can total more than 50%. Meanwhile, the top percentiles earn most of their income from investments, and they pay no more than 20% in tax on this, and these earnings are even exempt from National Insurance and health tax.

"It's unacceptable that the middle class has a higher tax burden than the top decile, which receives 87% of investment income. In order to fix this, the taxes on investment income must be raised immediately," the MK said.