Taking Stock / Six Myths About Tax

Reality: Naturally, when one earns a pittance, the effect of tax cuts is weak. In fact, low earners do not pay any tax at all, and under the tax reform, that break extended to 300,000 more people.

1. The tax reform Finance Minister Benjamin Netanyahu has been arduously promoting makes the rich richer, and the poor poorer. To prove the point, the rich are getting thousands more net each month, while the poor get a few dozen shekels. Comparing the tax payments the rich made in 2004 to what they paid in 2003 shows that their tax burden significantly shrank.

Reality: Naturally, when one earns a pittance, the effect of tax cuts is weak. In fact, low earners do not pay any tax at all, and under the tax reform, that break extended to 300,000 more people.

Also, the reform actually adds to the burden of the highest earners. The uppermost 20 percent pay 87 percent of all income tax in Israel, compared with 83 percent before the reform. Out of that 4 percent increase, a whole 2.8 percent is the "contribution" of the uppermost centile, which pays significantly more tax.

2. Israel's tax system is regressive: it widens income gaps. The reform complies with the capitalist policy imposed in recent years by lowering tax and also welfare benefits.

Reality: Israel's tax system is one of the most progressive in the world. It transfers tens of billions of shekels a year from the haves to the have-nots. The State Revenue Administration, a treasury department, reports that direct tax in Israel reduced income distribution disparity by 16 percent, according to the Gini index (or coefficient, which measures income inequality in society).

3. The rich don't pay tax. They have accountants and lawyers to find loopholes.

Reality: The truly rich, the ones with businesses abroad, can and probably do indulge in sophisticated tax evasion. But in recent years, many of the loopholes have been closed. The adoption of personal tax and capital gains tax have significantly increased the tax burden on the ultra-wealthy.

Then there are people earning salaries of NIS 100,000 or double or triple that a month. The tax burden on them is enormous. The State Revenue Administration says that 2 percent of the population pays 33 percent of all income tax.

4. All the tax reforms in Israel were designed to benefit the rich. All the poor get is scraps tossed to them in order to drive the bills through the Knesset.

Reality: In the last three years, the Income Tax Authority has reduced exemptions by NIS 7 billion. Most of that is due to taxing capital gains on all financial instruments. By definition, imposing tax on capital gains affects mainly the well-to-do: almost the entire public portfolio of assets belongs to the upper decile.

In 2004, the treasury collected NIS 1.8 billion in capital gains tax. Among salaried employees, capital gains contributes 0.6 percent of income, but at the top centile (1 percent), it comprises 33 percent of income.

5. Israel's tax burden has been steadily decreasing over the last decade to roughly the level of the burden in OECD nations. In some developed countries such as Denmark and Sweden, tax is even higher.

Reality: You might get that impression from the State Revenue Administration's report. It proudly demonstrates the declining tax burden in Israel, to 38 percent, and notes countries where people pay 40 percent.

But that international comparison is misleading. In most of the OECD states, the tax burden includes pension payments or mandatory social security. But in Israel, our social security system, namely the National Insurance Institute, provides a mean, paltry support to retirees, while in Europe the pension is the real thing, enabling the old to live in dignity, without impairing their standard of living.

If Israel's government had provided genuine pensions that assured one could maintain a decent standard of living, we'd have to increase effective tax in Israel by 5 percent. Israel would then be far from the levels of the OECD nations.

6. Israel's tax burden is high, but it's been steadily dropping for 30 years. At this rate, we'll reach normal levels one day.

Reality: Israel's pace of tax reduction is very slow. In fact, during the last decade, the tax burden dropped by less than 2 percent. The tax cuts of the latest reform merely offset tax hikes of the 1990s.

The gap between tax in Israel, and in the OECD countries, remains as wide as it was 15 years ago.