Study: Tax Policy Fails to Narrow Income Gap

Hike in value-added tax fails to narrow income gap.

How much did the hike in value-added tax by 1% three months ago cost you?

Most readers certainly couldn't come up with an answer. The VAT hike, which raised expenses for just about everyone, is very difficult to measure.

The changes in income tax brackets and rates, as well as higher National Insurance Institute payments, are also unknowns for most Israeli citizens. But research from the Taub Center for Social Policy Studies sheds some light on the effects of these changes on the cost of living in Israel.

In August 2011, the Trajtenberg Committee on socioeconomic change recommended raising direct taxes progressively, so the rich shouldered more of the burden, while reducing indirect taxes that mostly hurt the poorer classes.

In the end, only part of the recommendations were accepted. Then in August came the economic slowdown of 2012, with a doubling of the state deficit target and cuts in spending and rising taxes .

A few of the changes will reduce inequality, such as narrowing some tax brackets for higher earners and higher tax rates for some, the Taub Cneter said. These changes may fall harder on the top 10% of wage earners, but they ease up slightly on those in the fifth through ninth income deciles - while doing little for the bottom half. These calculations do not take into account Spetemebr's one percentage point rise in VAT.

The Taub Center reports that the rise in VAT cost the poorest 10% of the population 1% of their income, while the top 10% saw only a 0.3% reduction. The poor will wind up paying a much heavier price as of January with all the tax changes taking effect - paying the price of cutting the budget deficit.

In addition, much of the expected growth in tax revenue next year is still just on paper, such as increasing tax collections and cracking down on unreported income. If these evenues don't materialize the only solution will be further budget cuts coming mostly at the expense of the middle and lower classes, the report said.