Bar-On Declares New Income Tax Cuts

Finance Minister Roni Bar-On yesterday presented a revamped long-term plan to gradually lower personal income tax and corporate tax, from next year through 2015.

The plan is not "election economics," the minister insisted at a press conference yesterday: it's "a measured and balanced" plan that should boost economic growth and narrow social inequalities.

The plan conservatively assumes average economic growth of 3.5% a year - and introduces a controversial tax on employer contributions to study funds (kranot hishtalmut). That is expected to generate about NIS 2.2 billion in revenue a year, which would compensate for some of the state revenue lost because of the tax cuts. However, as with earlier attempts by the treasury to tax study funds, union leaders are voicing fierce opposition to the plan.

The long-term plan will also give all citizens a blanket 0.25-point tax credit, effectually raising the minimum taxable income for men from NIS 4,253 to NIS 4,725. Note that the plan remains subject to cabinet approval. It isn't a done deal yet.

Bar-On admitted that during the planning stage, he had neglected to discuss slapping tax on study funds, one of the foundations of the reform, with Histadrut chairman Ofer Eini. Perhaps already back-tracking from the plan, which is fundamental to his "package deal" approach, Bar-On did say that if the unions object (which they do), the plan could be tweaked. To date, the minister explained, Eini had demonstrated "a responsible approach" in his dealings with the treasury - which means, he has been slow to brandish his main weapon, public-sector strikes. There is no reason for him not to continue to do so, Bar-On added. He also suggested that the umbrella union should support his plan, since reducing corporate taxes would create jobs.

The treasury estimates that not taxing study funds is costing it NIS 3.7 billion a year in lost revenue. Of that, NIS 2.2 billion derives from tax exemption on employers' provisions to study funds.

No more: From 2009, the amount that an employer deposits into a worker's study fund will be added to the worker's gross pay, for purposes of tax. However, the addition will not affect the worker's healthcare and social-security payments.

In short, employer provisions into study funds will be treated as regular income for tax purposes, which could increase monthly income tax payments by hundreds of shekels. Employer deposits into study funds are already subject to taxation for gross salaries in excess of NIS 16,000.

Nor are the self-employed spared. They, too, will have to pay tax on their payments into study funds. However, returns that savers made on their study funds will remain exempt from income tax, Bar-On clarified.

The treasury says that the plan is justified by the fact that currently, just 37% of all employees receive study funds, and 87.5% of the exemptions benefit the top 3% of earners.

"The plan has focused on the middle-income earners, which currently bear the brunt of the tax burden, even thought they are the engine that drives the Israeli economy" Bar-On said. "Cancelling the tax exemption will contribute to a more equitable distribution of the tax burden, and result in a higher net salary for the public at large."

Treasury officials have been discussing the plan to cut income tax and cancel the exemption on study funds for months, and will bring the plan before the cabinet shortly.

According to treasury figures, the average corporate tax in OECD nations will be 23.6% in 2014, while Israel's will be lower. Israel is joining the trend in the world's leading economies to reduce company taxes, Bar-On said, but Israel will go further, rendering the economy more attractive and competitive.

"During this period of economic slowdown, fluctuation and exposure to global shocks, we are trying to abolish uncertainty and concern," he said.

Bar-On says that his plan will make the economy more attractive for both the private and business sector.