Last Thursday the committee headed by Treasury Director-
General Avi Ben-Bassat published its long awaited plans for
reform of the tax system and capital markets of Israel. On
Sunday the government approved the plan but set up a special
Cabinet committee to discuss the package and suggest changes.
Finance Minister Shohat, who is a member of the committee,
said that he would work to ensure that the changes are
The goal of the reform is to simplify and modernize the
extremely complicated tax system of Israel by eliminating
virtually all of the special breaks accorded to various
groups and to universalize the tax payments so that the
market can allocate the country's financial resources
efficiently. In Israel's complicated system it was extremely
difficult to make rational capital allocation decisions, and
often the allocation was distorted by artificial tax
Under the plan, the maximum marginal tax rate, including
health and National Insurance Institute payments, will be
reduced from 59.7% to 50%. Wage earners will reach it at an
income of NIS 14,001 ($3,500) a month.
Other key proposals made by the committee include:
* A tax on employers' contributions and real gains in
continuing-education funds (kranot hishtalmut). These
funds are very large but the special status they have enjoyed
prevents their resources from being properly invested.
* An estate tax of 10% on gifts distributed while alive or
posthumously beyond $1 million;
* A capital gains tax of 36% on profits in the local stock
market (hitherto tax free);
* Taxation of foreign assets;
* All savings schemes will be taxed;
* A 25% tax on cumulative profits from sales of apartments
after the first NIS 1m. in real profits;
* Elimination of the half-point tax benefit given to all
* The elimination of tax breaks given to industry workers,
such as Israel Electric Company employees, for afternoon,
evening, and night shifts;
* The elimination of tax breaks given to Eilat-based
* A 10% tax on apartment rental income exceeding NIS 3,000
* Additional tax credit points will be given to mothers of
young children under 12 years old;
Pension plans of all types will not be taxed, nor will
savings schemes currently in effect.
Another aim of the reform is to redistribute the tax burden
from the middle class to the upper class, by taxing various
previously untaxed income streams (including capital) while
reducing the income tax paid on salaries.
Under the reform, the number of those filing tax returns will
rise gradually, from 22% to 29% of all taxpayers in the first
year and higher thereafter. Up to now, wage earners in Israel
did not have to file a tax return every year. The taxes they
pay are deducted from their wages, and most other economic
activities they engage in (savings plans and stock purchases)
The Israeli government plans to ask the Knesset Finance
Committee to approve transitional regulations to begin the
formal implementation of the economic reform. If the tax
reform proposal is approved by the government and the
committee later this year, the taxes on various savings plans
would go into effect retroactively from Monday, 3 Iyar-May
The Histadrut held a one-hour work stoppage on Sunday to
convene and discuss the planned reform.
Ben-Bassat explained how the reform became important:
"Basically, we had a series of irrational tax exemptions
which were legislated thanks to pressure from interest
The tax reform proposal is expected to reach the Knesset for
its preliminary reading some time next month. Shohat hopes it
will be approved by the end of October, but many observers
are skeptical of the chances of many provisions, given the
power of the special interests and the weakness of the
National Religious Party leader Housing Minister Yitzhak
Levy, for example, said that he is opposed to the elimination
of the tax break given to all women, and that he wants a
threshold for savings to be set before being taxed.
Interior Minister Natan Sharansky (Yisrael Ba'aliya) said he
is ardently opposed to the tax on home rentals. Ministers Eli
Yishai, Dalia Itzik, and Yuli Tamir have also said they
oppose the proposals in their current form.
Pressure groups like the Israel Women's Network and Na'amat,
the Manufacturers Association, and the Histadrut are also
working to eliminate clauses in the reform of interest to
Likud leader Ariel Sharon called the plan "antisocial" and an
attempt to "dig deeper into citizens pockets." He said it
would hurt more of the population than it would help. He
pledged that he would cancel any antisocial measures that are
approved if elected prime minister. Sharon said the Likud
would fight in particular against taxes on inheritance and
The Arab parties are not expected to support the plan.
As of now, only Israelis who never had immigrant rights must
report passive income from abroad, which includes interest,
dividend payments, certificates of deposit, or home-rental
incomes, among others.
Immigrants who keep their overseas income overseas were never
required to report or pay taxes on their passive income.
"They now want to change the tax system so that all your
income, whether you brought it or not, is taxable at Israeli
rates," Yitzhak Heimowitz, chairman of the legal committee of
the Association of Americans and Canadians in Israel, told
The Jerusalem Post.
Contrary to popular belief, Heimowitz said that capital-
gains taxes of 35 percent have always been in effect for
immigrants who realized profits on overseas stock markets.
However, very few immigrants living in Israel actually
reported this income, as the law did not require them to do
so. Immigrants from the U.S. paid only the 25% U.S. tax rate
required by American law.
That is the crux of what led former finance minister Yaakov
Ne'eman to refer to some American immigrants as "tax evaders"
in a highly publicized outburst in November 1998.
The major immigrant organizations realized long ago that,
with the liberalization of the shekel in May 1998, the issue
of passive income abroad was going to come to a head.
Everyone agreed that, once Israelis were permitted to open
accounts abroad, all income from abroad would have to be
reported to prevent the US, or any other foreign country,
from become a de facto tax haven.
In fact, from an economic perspective, this reform should
have accompanied the 1998 shekel liberalization, but Ne'eman
and then prime minister Binyamin Netanyahu - who had drawn up
a similar comprehensive tax reform plan - never mustered the
political backing to present it to the public.
Heimowitz explains why immigrants should not be taxed: "The
difference is that the money an Israeli places overseas was
earned here, but the savings of an immigrant that was earned
abroad is in no way linked to Israel."
This is especially damaging, he says, because immigrants have
no recourse; they will have to pay taxes on savings that, in
many cases, they were relying on to be tax-free to help
finance their immigration.