The Ministry of Finance published yesterday (Tuesday) the data on state revenues for the month of February and announced that the state deficit at the end of February was about 2.2 percent of GDP. This is a decrease of about one percent compared to the deficit at the end of January. The decrease in the deficit is explained by an increase in state tax revenues: these revenues increased by 19% compared to February 2021. For the first time in 13 years, a surplus of about NIS 4 billion was recorded in the state coffers. In January-February 2022, revenues amounted to NIS 82.2 billion Compared to NIS 61.4 billion in the corresponding period last year, an increase of about 33.4%. On the other hand, expenditures also continue to decrease. Since the beginning of the year, state expenditures amounted to about NIS 60.5 billion, a decrease of about 17.6% compared to the corresponding period last year.
The Minister of Finance boasts of high tax revenues as an indication of the good condition of the economy. If companies pay more tax it means they are earning more, and therefore a larger share goes to the state coffers. But the big increase in taxes, as well as the big increase in growth we saw in 2021 (which ended with a growth figure of 8.1%) comes mostly from the same places: high-tech, the capital market and the real estate market.
Another report released by the Ministry of Finance this week is the State Revenue Report for the years 2020-2019, which also includes preliminary data for 2021. This is a report published by the Chief Economist Division once every two years, which is the most comprehensive report in the field of taxes in Israel. According to the report’s estimate, in 2021 the tax revenues of the wider government amounted to about NIS 496 billion, which is about 31.9 percent of GDP, of which the central government’s tax revenues stand at about NIS 384 billion.
According to the report, government revenues rose as a result of the increase in consumption that came with the recovery from the corona crisis. Three industries in particular caused this increase. First, the rapid growth in the high-tech industry, which had a particularly successful year. A precedent of over $ 80 billion, led to a 136 percent increase in the volume of high-tech companies, and increased the number of Israeli unicorns in about 33 new Israeli companies worth $ 1 billion and more. To state revenues and brought them to the highs we see this year.
In addition, two other areas contributed to the high revenues: the capital market, which had a particularly successful year last year (slightly less in the current year), and led to an increase in state revenues from capital gains. The second area, of course, is the real estate industry, which has continued to break records in the past year, leading to a significant increase in state revenues from real estate transactions. In addition, the government’s announcement of an increase in the purchase tax led to the establishment of acquisitions in the real estate market and therefore to an increase in income in 2021. The increase in income from these three areas is a real increase of about 22% from 2020 and about 20% from 2019. The rate of increase in state revenues In 2021 it is 5.4 times higher than the annual average growth rate in the last decade.
These optimistic data are not expected to persist, as estimated by the Chief Economist Division. The recovery from the corona crisis and the occupied demand will eventually come to a standstill, high-tech will not continue to grow at this rate, and a large part of the demand as estimated by the Treasury is one-time.
The Chief Economist Division also examined the tax system in Israel as a whole, the various types of tax that exist in Israel and these were examined in an international comparison. According to a comparison made by the Ministry of Finance, contrary to common arguments, the tax burden in Israel is not low compared to developed countries. In 2020, the total tax dew in Israel was 29.7 percent of GDP, 3.8 percent lower than the OECD average. But unlike other OECD countries in Israel, mandatory pension provisions are not included in the total tax payments because they are transferred to private pension companies. Had the mandatory pension provisions been counted in all tax payments, as is customary in most OECD countries, the tax burden in Israel would have increased by 2.8 percent and would have stood at about 32.5 percent, very close to the OECD average.
However, Israel differs in international comparison in its tax mix, ie in the relative share of direct taxes (income tax collected directly from the citizen), and of indirect taxes (such as VAT collected by businesses). The tax mix in Israel is characterized by a higher weight of VAT revenue. M compared to the OECD average of about 12.7 percent more, and lower weight in the income tax on individuals about 8.3 percent less than the average of developed countries. The share of employers in Social Security contributions is also about 9.6 percent lower, although employers in Israel are subject to a pension obligation that is not included in the calculation of the tax burden.
The main meaning of choosing one type of tax or another is value-based and principled: income tax is a more progressive tax, meaning it imposes a higher burden on the higher deciles and its rates rise as income increases, and is therefore considered more “social”. In contrast, VAT and indirect taxes are regressive taxes. Their rate is fixed, 17%, no matter what the level of income of the person who pays them. However, indirect taxes are considered taxes that are less detrimental to economic growth, as raising direct taxes like income tax Corporate tax lowers the motivation to increase revenue.
The data in Israel indicate that half of Israelis do not pay income tax, either because they do not reach the tax threshold or because of credit points. On the other hand, the two higher deciles pay about 80% of the total income tax paid in Israel, which indicates the high progressiveness of the income tax. In contrast, the rate of indirect taxes paid by the lower deciles is higher than that paid by the upper deciles. The indirect tax rate consistently decreases from 37% of gross income in the bottom decile to 8% in the top decile. Of course, the non-income tax population pays other taxes, VAT of course but also social security contributions, health tax, and other indirect taxes. When you add the direct and indirect taxes together the tax rate paid by the lower decile is 47% of income, it drops to 33 38% of the income in the second to eighth deciles then increases to 41% in the ninth decile and 48% of the tenth decile.
The current tax mix in Israel indicates that it has chosen a path that increases growth, at the expense of trying to reduce inequality. This is especially true since the early 2000s, since 2003 Israel has chosen for reasons of economic efficiency and an attempt to increase growth and get Israel out of the recession it was in those years, increase the weight of indirect tax and reduce the weight of direct tax. The income tax brackets went down in the following decade, and VAT went up. The 2011 social protest turned the picture around, leading to an attempt to reduce indirect taxes.
A calculation conducted by the Office of the Chief Economist shows that although indirect taxes increase inequality by about 8%, direct taxes reduce it by about 8%, which means that the tax system as a whole reduces inequality in Israel by about six percent.
The chief economist, Shira Greenberg, said that “taxes finance public expenditure. The tax mix and its efficiency affect, among other things, economic growth and the distribution of income in the economy. Therefore, the entire tax system and its effects on these parameters must be examined. 6% inequality. The tax burden in Israel is similar and even slightly lower than the OECD average.