Keeping It Real / Just in Time for Tisha B'Av, Marginal Tax Is Rising

The higher marginal tax rates are, the less incentive people have to work hard and earn more.

The best way to drive economic growth is to lower tax on labor. Tax cuts encourage people to work: they get more buck for their bang. Tax cuts attract investors and entrepreneurs. Tax cuts stimulate manufacturing and brings home young Israelis who went to seek their fortunes in foreign lands.

And Bibi knows it well. On the eve of the last election, Benjamin Netanyahu himself stated, "Tax cuts are like jet fuel. I don't know anything that stimulates economic growth more."

In practice, what he's doing is raising taxes, including tax on labor.

The higher marginal tax rates are, the less incentive people have to work hard and earn more.

From August 1, yes, next week, the maximum marginal tax rate - the rate that is applied to taxable income - rises to 58%. That's because the government is raising the ceiling on provisions to the National Insurance Institute and health tax.

Above a certain threshold of income workers stop paying more each month to social security and for health tax. That threshold is being moved up.

Up to now Israelis handed over up to 12% of their monthly wage, up to a ceiling of NIS 38,500 (which is about five times the average wage), for social security and health tax. That ceiling is being doubled from August 1, to ten times the average wage or NIS 77,000 a month.

If you earn NIS 77,000 a month you're going to be paying another NIS 4,600 a month in tax.

Ostensibly, the maximum marginal tax rate stays at 46%. For every 100 shekels you earn above NIS 77,000 a month you pay only 46 shekels in tax. But how many people earn more than NIS 77,000 a month? Therefore, in practice, the actual maximum marginal tax in Israel is 58%, among the highest in the West. It's bad for growth and bad for immigration.

But Israelis aren't about to be caught with their pants down. Accountants report brisk traffic of high earners inquiring about the possibility of dodging the tax hike by incorporating themselves as a company. Instead of being employees, earning a salary, they'd sell their services - the same work they do now - to their erstwhile employer.

We've been there before. That's exactly what happened in 2002, when Silvan Shalom as finance minister raised the ceiling. Israelis stampeded to quit their jobs, officially, and set up private companies. Now Netanyahu is making the same mistake.

So Israelis will set up companies rather than get salaries, and the Finance Ministry will be getting a lot less tax income than it expected. In addition, private companies are entitled to defer tax payments, and dividends are exempt from health tax and social security payments. Companies can also deduct costs on cars, foreign travel, training and a thousand other things.

The Director General of the Finance Ministry, Yarom Ariav, vows to foil any mass metamorphosis from salaried employee to budding tycoon: "We will act as though it were actual fraud," he says.

But it isn't fraud. It is a perfectly legitimate tax planning maneuver which is an apt response to the terrible mistake being made by Netanyahu, Finance Minister Yuval Steinitz and Ariav himself.

That isn't the end of the horror. Because of the pressures of those knights of the round table, Manufacturers' Association of Israel president Shraga Brosh and Histadrut labor federation chairman Ofer Eini, employers will have to pay another 0.4% of their wage outlay to the National Insurance Institute. That is an excellent way to encourage layoffs.

Also, in September, a sum equivalent to a quarter day's work will be deducted from all salaries. The employer will have to add the same amount. This is a one-time tax to "help troubled manufacturers," though all it does is empower Eini and Brosh some more, giving them NIS 250 million to play with. That is a scandal in and of itself.

How much does a colonel make?

Meanwhile, on Tuesday the Knesset approved a bill proposed by MK Shelly Yachimovich (Labor), to broaden disclosure of public-sector wages. Until now, Article 29 of the Budget Law enabled disclosure only of wage irregularities and any salaries above NIS 18,000 a month. Yachimovich argued that it isn't right to pick on only the high earners: there are low earners as well.

The truth is that there are very few low earners in the public sector. Low earners are the province mainly of the private sector.

In any case, her amendment is an important one. It's time Israelis learned the truth about the gigantic wage gaps in the public sector, because labor unions always take care of the strongest members - themselves.

Ilan Levin, the public-sector wages director at the Finance Ministry, didn't oppose the amendment. In fact, he augmented it so the defense establishment would have to start disclosing its pay norms as well.

Until now they hadn't, on the preposterous grounds that disclosure would damage security. Yesterday the defense establishment tried to torpedo the Yachimovich amendment, but Netanyahu backed Steinitz and stood firm against Defense Minister Ehud Barak.

Levin doesn't mean to publish the army officers' names, just the salaries of the top 10% of earners and the bottom 10%, and the average wage per rank from sergeant to general.

Then we will learn whether the financial adviser to the army chief of staff, Brig. Gen. Maharan Prosenfer, has it right. Prosenfer claims that pay levels among home front career officers are lower than that of their counterparts in the civil service. It's a ludicrous claim that will shortly become a lot harder to sustain.