20.3.2005
 
Tax rates on wages in Israel––an international comparison
 
This release gives an excerpt from the Bank of Israel Annual Report for 2004 to be published on 4 April 2005, and is based on research by Dr Adi Brender,
"Tax rates on labor income in Israel following the tax reform: an international perspective."
 
To the full paper (Hebrew) - Click here
 
  Cuts in the rates on income tax in Israel in the last two years brought average tax rate on wages to the levels customary in the advanced economies for all levels of income; in 2002 and at the end of the 1990s the levels in Israel were considerably higher that the norm in other countries.
  At income levels below twice the per capita GDP (i.e., about NIS 13,200 a month in Israel), which covers more than 85 percent of the gainfully employed in Israel, the average tax rate in Israel is lower than that in the OECD (Organization for Economic Co-operation and Development).
  The average tax rate in Israel is lower than that in the EU member countries at all income levels.
    The marginal rate of tax at income levels above NIS 9,000 a month are higher in Israel than in the OECD countries, and are similar to, or even lower than, the average rate in the EU countries.
  Unlike the system in the OECD, Israel's tax system does not take into account the marital status of the wage earner, and does not grant tax benefits to those with children, who constitute a large share particularly among the lower income groups.
  Only about 50 percent of working mothers in Israel manage to take advantage of the tax credits to which they are entitled on account of their children, due to their low wage.
  Granting tax benefits in Israel on the basis of family composition, as is the practice in most advanced economies, could reduce poverty among households with at least one wage earner, at a low budgetary cost.
The Bank of Israel Research Department announces the results of an international comparison of rates of tax on wages which shows that the average tax rate on wages in Israel is not higher than the rates in the developed countries. The findings show that at income levels below twice the per capita GDP (i.e., about NIS 13,200 a month in Israel), which covers more than 85 percent of the gainfully employed in Israel, the average tax rate in Israel is lower than or similar to that in the 26 member countries of the OECD. The review also shows that at the higher levels of income too the differences between the rates in Israel and in these countries is not a large one. It was further found that average tax rates in Israel are lower than the equivalent rates in the EU countries at all income levels. It is worth noting that following the income-tax reform and the additional cuts in the rates in 2004, the differentials in tax rates between Israel and the OECD economies, which had reached high levels in 2002, contracted. The differentials were particularly high at income levels between 1.66 and 4 times the per capita income level (in Israel between NIS 11,000 and NIS 28,000 a month), and because the tax cuts were made mainly at these levels, the differential narrowed. It was also found that the marginal tax rates in Israel are still higher than the average in the OECD economies at income levels higher than NIS 9,000 a month, but are lower than or similar to the average in the EU countries, which have higher tax rates than those in the other countries.
The calculation of the tax rates takes into account rates of income tax imposed by the government, National Insurance contributions paid by the employee, and income tax paid to regional governments and municipalities in countries where such taxes are imposed. Calculations were carried out for eight levels of income and for households of different compositions, taking into account exemptions and tax benefits in effect in each country.
The comparison shows further that the system of income tax in Israel is different from that in most of the developed countries in that it hardly relates to the worker's family situation. Whereas in nearly all of the advanced economies (with the exception of Finland, Poland, Sweden and Turkey) parents receive tax allowances for their children, and in some countries a married couple is given tax benefit if only one of them is working, in Israel these benefits apply only to working women, a practice with no parallel in any of the other countries. Since in Israel only 55 percent of women are employed, of whom only 50 percent reach the tax threshold after the individual tax credit points are taken into consideration, only about a quarter of families with children actually receive these tax benefits. Moreover, in only about 65 percent of families receiving tax benefits, mainly those with one or two children, do the women reach the income level which would enable them to obtain the full benefit to which they would be entitled. In contrast, the norm in the advanced economies is to base the tax benefits on the income of the higher earner of the couple or on their joint income. As a result, the extent of tax benefits for a wage earner with two children in those countries amounts on average to about 10 percent of the wage at low income levels. At an income level of twice the per capita GDP these tax benefits average about 4 percent of the income.
The adoption of a tax system in Israel in which tax benefits are granted to families together with a rise in the basic tax rates at low income levels, similar to the situation in most of the advanced economies, would reduce the extent of poverty among families with at least one wage earner, at a low budgetary cost.
 
Average Rate of Tax on Wage Income by Family Composition and Income Level, Israel 2005 and OECD and EU Countries 2003 and 2004
Level of income (percent of per capita GDP) Israel 2005 OECD average EU average Difference between Israel and OECD
Percent
Batchelor          
  50 4.5 17.8 17.8 -13.3
  75 10.1 21.9 23.1 -11.7
  100 15.9 24.9 27.0 -8.9
  133 21.6 28.1 30.8 -6.5
  166 25.8 30.5 33.5 -4.8
  200 29.3 32.5 35.6 -3.1
  400 38.8 38.2 42.1 0.7
  1000 45.1 42.9 46.8 2.2
Married          
  50 4.5 14.2 14.3 -9.7
  75 10.1 18.2 18.9 -8.0
  100 15.9 21.3 22.6 -5.4
  133 21.6 24.7 26.6 -3.0
  166 25.8 27.3 29.8 -1.5
  200 29.3 29.5 32.2 -0.2
  400 38.8 36.2 39.7 2.7
  1000 45.1 41.9 45.7 3.1
Married +2          
  50 4.5 8.3 9.6 -3.8
  75 10.1 14.7 15.5 -4.5
  100 15.9 18.8 20.0 -2.8
  133 21.6 22.8 24.6 -1.2
  166 25.8 25.7 28.0 0.1
  200 29.3 28.0 30.7 1.3
  400 38.8 35.3 38.7 3.5
  1000 45.1 41.6 45.3 3.5
 
SOURCE: Calculations of the Bank of Israel Research Department based on Price Waterhouse Coopers, Individual Taxes 2003–2004, OECD data, IMF, and countries' tax bases.