JERUSALEM, May 7 (JTA) The Israeli government is proposing sweeping tax reforms aimed at addressing the widening gap between rich and poor in Israeli society.
The reforms, proposed Thursday by the Finance Ministry and approved by the Israeli government on Sunday, are Prime Minister Ehud Barak’s first major economic policy move since he came to power on promises to address Israel’s social and economic gaps.
Finance Minister Avraham Shochat launched a public relations blitz to present the package as a Robin Hood-like effort at a “social and economic revolution” that would reallocate Israel’s wealth from rich to poor.
“The income tax burden will fall dramatically and net income will rise significantly in a way that all of us will feel,” he said.
The centerpiece of the reforms is a new capital gains tax of 25 percent on income and interest from investments and savings.
“This step will not only bring social justice but a major contribution to narrowing gaps” in Israeli society, Shochat said.
Avi Ben-Bassat, the reformist director general of the Finance Ministry who headed the tax reform committee, said, “The main step of our committee is to create a more just tax system for the state of Israel.”
The capital gains tax is meant to increase the tax burden on wealthier Israelis, who account for the lion’s share of earnings on the stock exchange.
Until now, in contrast to most countries in the western world, Israelis were not liable for paying a capital gains tax on investments they made in Israel.
The committee also recommended lowering tax brackets gradually for middle income earners.
For example, Israelis who earn about $1,000 a month are subject to a tax rate including social security and health tax payments of nearly 40 percent.
Under the new proposals, this would fall to 35 percent in 2001, and eventually drop to 32 percent in 2003.
The highest tax bracket, which kicks in when earnings reach some $4,600 per month, would fall from 59.7 to 50 percent.
The lowest bracket would fall only slightly from 15.7 percent to 15 percent. But the bracket for those earning about $500 a month would fall from 25.76 percent to 15 percent.
Other elements of the plan include levying taxes on inheritances and gifts, and requiring more Israelis to file annual income tax reports.
The new capital gains tax is expected to generate about $1.9 billion in taxes annually. Meanwhile, the government will lose about $2 billion in revenues in the first year of the plan and about $2.8 billion by 2003.
“This reform is long overdue,” said Keith Phillips, Israel analyst at investment bank Credit Suisse First Boston in London. “This is the way forward.”
Five committees have recommended tax reforms in the past, but all were shot down by the Knesset.
The new reforms are expected to face a tough battle.
Ariel Sharon, leader of the opposition Likud Party, called the proposals antisocial and promised his party will object to several elements.
However, political opponents will find it hard to object to the core proposal taxing earnings from the stock exchange. The debate will probably focus on proposals to tax savings plans.
“They are levying too little tax on capital and too much on savings,” Professor Aryeh Arnon, director of the Economics Department at Ben Gurion University in Beersheba, told Israel Radio.
“These are good steps toward rationalizing the system,” said Arnon. “But the pretense that this is a social and economic revolution is exaggerated.”
The Knesset is expected to begin debating the package next month and it will take effect in 2001 if approved.