Israel's Tax Revenues Hit Record High in January 2015

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Shekels.Credit: Bloomberg

More tax funds were injected into the state coffers in January — 25.4 billion shekels (about $6.4 billion) — than in any other month since the country was founded.

Tax revenue data for February are also expect to show an increase over the 21.2 billion shekels collected in November and the 21 billion shekels in December, but are not expected to be as high as January’s take. Either way, it’s good news for treasury officials drafting a state budget to be presented to the future finance minister after the March 17 election.

The biggest reason for the record high is the record collection of direct taxes, which includes income and corporate taxes, as opposed to indirect taxes such as value-added tax and customs duties.

The Israel Tax Authority collected 13.2 billion shekels in direct taxes and 11.6 billion shekels in indirect taxes in January. The same month last year broke a record for indirect taxes, bringing in 12.1 billion shekels.

The government took in 254.7 billion shekels last year, representing a steady increase over the 240.6 billion shekels in 2013, the 218.1 billion shekels in 2012 and the 211.5 billion shekels in 2011.

Finance Ministry officials said there has been a trend over the past few months indicating a sustained increase in tax revenues, of about 4% to 5% over the course of a year. That’s also consistent with the assessment that economic growth in the country has picked up in recent months, with employment levels up and the jobless rate down.

Finance Ministry sources now expect that the tax collection target for 2015 will be set at around 270 billion shekels — 10 billion shekels higher than the draft 2015 budget presented by Yair Lapid when he was finance minister in the previous government.

Other factors boosting expectations for higher tax revenues include the tax authority’s collection efforts — such as targeting tax havens abroad where undeclared income may be hiding — and the forecast that the economy will grow by 2.9% to 3% this year, up from an earlier forecast of 2.7%. Some are forecasting even greater growth this year.

Draft budget

When the Knesset disbanded in December and new elections were called after Lapid and Justice Minister Tzipi Livni were fired from the cabinet, the country was left without an approved budget for 2015 and without a full-time finance minister. (Prime Minister Benjamin Netanyahu is acting finance minister.)

The Finance Ministry’s staff is working on a draft budget that will have to be approved by the next Knesset. In the interim, the government is operating on a kind of autopilot, with spending based on last year’s spending limits.

But the expectation of higher tax revenues is likely to enable treasury officials to present the future finance minister with a budget that allows for higher spending, especially on social services and infrastructure.

All the parties in the current election have publicly opposed increasing tax rates in the 2015 budget. Some, however, have spoken of eliminating some tax exemptions, which would have the same effect as higher tax rates for some.

Compared to the prevailing situation abroad, Israel’s regressive indirect tax rates are high, while its progressive direct taxes are low. The prospect cannot be ruled out that after the election, VAT rates might be lowered while income tax rates could be increased.

Before the election was called, the cabinet approved a draft budget that set a very conservative tax collection target of 259.7 billion shekels for 2015. It was set before the Finance Ministry knew that tax revenues for 2014 would come to 2.7 billion shekels more than the collection target. Now that the ministry is working on a new version of the 2015 budget, the budget will presumably be based on a higher tax take for the year.

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