Yes to Negative Income Tax

At a time when the Western, competitive world is cutting taxes, Israel cannot resist such a move if it wants to remain on the international investment map.

The treasury is currently at work on another round of tax reforms with the aim of reducing taxes to spur growth and encourage employment. At a time when the Western, competitive world is cutting taxes, Israel cannot resist such a move if it wants to remain on the international investment map.

A comparison between the taxation levels in Israel and Western countries shows that regarding value added tax, Israel is not exceptional. When it comes to income and corporate levies, however, Israel stands out with overly high tax rates when income tax brackets rise quickly, reaching very high levels even at relatively low incomes.

Thus, action must be taken in every area. On the one hand, spreading out the income tax brackets and lowering marginal tax and on the other, dealing with the five lowest deciles that do not pay taxes at all.

Only recently, with the advent of income tax reforms that raised the tax threshold, 300,000 more people joined the ranks of those workers who do not pay income tax. This amounts to 1.2 million people who earn up to NIS 4,000 a month. These are the people who must be encouraged to remain in the job market, since the most important social goal is to encourage the move from welfare benefits to the labor market.

An additional danger that must be dealt with is the growing gap between rich and poor in Israel. Social bonds cannot be tightened with gaps so wide. It is worthwhile improving the situation of the bottom deciles via several measures: negative income tax, professional training, adult education and a far greater investment in the Wisconsin Plan for the unemployed.

Negative income tax will encourage people to go out to work, and the replacement of foreign workers in the agricultural, construction, nursing and house-cleaning industries. Returning to the job market will give people back their self-respect, self-worth and status in their families. The National Insurance Institute is in favor of negative income tax, as is the Bank of Israel. It is thus surprising that the treasury has not yet adopted the idea.

The implementation of a negative income tax is not simple. There are also concerns that employers will cut their workers' pay in the knowledge that the income tax authorities will make up the difference. But proper supervision can prevent this.

Cutting corporate tax is also a step in the right direction. The trend in European Union member states is to cut it to 30 percent, while Eastern European countries collect an even lower tax. Israel cannot propose a higher tax if it wants companies to remain here and to attract investment.

The income from taxes is, of course, what makes the program to cut taxes possible, and no one would think for a minute of increasing the government's deficit in order to fund it. However, the basic advantage of any tax cut is that the government has to make do with less, that is, to become more efficient. There is room in the current budget of NIS 226 billion to do away with duplications and waste, and to make savings. As the government takes fewer resources from the economy, more workers and capital will be available for the private sector, which then can be used for more rapid growth with a higher level of employment.