Steinitz Balks at Taxing Rich More, but May Tax Luxury

Treasury is considering a new tax on luxury goods, designed to bring in an estimated NIS 400 million per year, which would replace the expected income from the surtax.

After the proposal for a surtax on particularly high incomes fell through, the Finance Ministry is looking for new ways to make the rich pay.

The treasury is considering a new tax on luxury goods. It would be designed to bring in an estimated NIS 400 million per year, which would replace the expected income from the surtax.

Yuval Steinitz - Ofer Vaknin - 25102011
Ofer Vaknin

The committee headed by Prof. Manuel Trajtenberg, which was charged with recommending changes to the country's social and economic priorities, had suggested imposing a 2% surtax on incomes of more than NIS 83,000 a month, or NIS 1 million a year.

The tax would have effectively raised marginal income tax rates to 50% for the country's best-paid residents, and capital gains tax from 27% to 30%. The Tax Authority estimated it would have brought in another NIS 400 million a year, which is not a lot, meaning that the tax's value would have been primarily declaratory, not financial.

The surtax had been an integral part of Trajtenberg's tax recommendations and had been included in the legislation based on these suggestions up until the last minute. On Monday, a moment before the Knesset voted to make the tax recommendations law, Finance Minister Yuval Steinitz agreed with Knesset Finance Committee chairman Moshe Gafni that the surtax would be dropped.

Gafni and Steinitz had been at odds over the matter - Gafni had argued that it would not only affect the rich. The Finance Ministry offered to postpone the vote on the entire tax bill, but Prime Minister Benjamin Netanyahu ordered them to hold the vote anyway. Thus, it was agreed that the problematic clause would be removed at the last minute.

Since the Trajtenberg recommendations had been fiscally balanced - meaning, the costs equaled the revenues - the last-minute omission created a NIS 400 million hole in the budget. In search of replacements, the Tax Authority suggested imposing a new tax on luxury goods. It has not defined what items would fall into this category, or what the tax rate would be.

Other options include reducing tax exemptions at duty-free shops or canceling the tax break on cell phones.

Political sources criticized the last-minute decision to drop the surtax, since this was the Trajtenberg report's biggest declarative step in raising taxes on the rich. Furthermore, it would have created a basis for further taxation on high salaries, they said.

Knesset sources said Steinitz and Netanyahu hadn't liked the proposed tax in the first place, so they were pleased with the solution.

Gafni had opposed the tax both because he said it was taxation on top of taxation, and that it wouldn't affect the rich exclusively. "Why not create a new marginal income tax bracket, beyond the new 48% bracket, of 50% on incomes above NIS 1 million?" he suggested.

Finance sources said Netanyahu would object to such a move, due to his belief that people should keep the majority of what they earn.

Gafni also noted that middle-class people who withdraw their entire pension savings at once could be forced to pay this surtax on their investment earnings. Likewise, people who sell an investment apartment could face this tax due to betterment calculations, he said.

Meanwhile, November tax data indicated that government income from direct taxes dropped, while income from indirect taxes increased. Direct taxes are taxes paid directly based on income, such as income tax, while indirect taxes are those paid through purchases, such as VAT and customs.

Direct tax revenue fell 6.1% versus November 2010, while indirect tax revenue increased 6.3%.

Total tax revenue was down 0.4% compared to last November, to NIS 17.5 billion.

Total tax revenue for 2011 as a whole is forecast to be NIS 4.5 billion less than expected, due to the slowing economy.