Average taxes on salaried labor in Israel rose slightly last year, but remain significantly lower than the average for countries belonging to the Organization for Economic Cooperation and Development, according to an OECD report released over the weekend.
The report showed that total taxes paid by an unmarried salaried employee with no children earning the nationwide average wage was 20.7% last year, up from 20.4% in 2012. The average for OECD countries was 35.9%. Israelis in that category paid lower taxes than 30 out of 34 OECD countries.
The average rate of tax paid by a married couple with two children, only one of whom is the breadwinner earning the average wage, was just 17.4%, up from 16.6% the year before but still far below the average of 26.4% for OECD countries.
The OECD bases its figures on the difference between the cost of employing a salaried worker and the amount he or she takes home after taxes and other deductions, which in Israel includes National Insurance contributions and the health tax as well as taxes paid by employers for their employees. It also takes into account child allowances and negative income tax.
Although there was a slight rise in the tax burden last year, over the past decade it has dropped dramatically, by some 10 percentage points. The decline reflects Israeli tax policy over recent years, which has sought to reduce the income tax burden while reducing social spending and transfer payments.
“Income tax is more progressive and social,” explained Prof. Michel Strawczynski, an economist at the Hebrew University and head of the Economics and Society Program at the Van Leer Institute in Jerusalem. “In the last decade because of the reduction in income tax and the rise in indirect taxes like the value-added tax, our ability to reduce inequality has been undermined.”
Israeli indirect taxes are higher than the OECD average.
Income tax is not low across the board for Israelis. The OECD only surveys taxes on salaries up to 167% of the national average, but in Israel the tax regime is built on those with the highest incomes paying the lion’s share of taxes.
The Finance Ministry estimates that in 2011, the latest year for which figures are available, no less than 58% of all income tax was paid by the those earning the highest 8.2% of all salaries. They paid a tax rate of 33% to 45%, rates that apply to monthly incomes in excess of 21,000 shekels ($6,070), or 200% of the national average.
Strawczynski said that low income taxes prevail typically in less developed countries like Mexico and Chile, but for different reasons than they do in Israel.
“In Latin American countries it’s hard to collect direct taxes because the black market is so extensive. They have no choice but to collect indirect taxes,” he said. “In Israel, we’ve reduced direct taxes to increase competition and stem brain drain, but in the process we’ve skewed the tax system.”