IASPS Op-Eds
Comments on the Decline of a Nation-State
March 20, 2000
Are Israelis Really Overtaxed?
by Yossi Laster, IASPS Associate Fellow
On March 16, Dan Gerstenfeld reviewed a research paper on taxation
by the Research Department of the Bank of Israel in the Jerusalem Post.
The article entitled “Are Israelis really overtaxed?” showed that the tax
burden in Israel in relation to the GDP is only somewhat higher than the
average for Western countries. However, the Jerusalem Post writer did not
bother asking the Bank of Israel economists a simple question: if the
situation in Israel is so good, then why are so many Israelis unable to afford
basic goods and services which are easily affordable for Europeans and
Americans?
The research paper used data from a report by the State Revenue
Administration for 1998, which is published annually by the Ministry of
Finance. This is the official government publication on taxation, which
presents data on all aspects of tax collection in Israel, including an
international comparative survey. According to the report, the tax burden in
Israel for 1998 stood at 40.4 percent of the GDP while the average for the
OECD countries was 37.7 percent of the GDP. The writer adds that in the
category of direct taxes, Israel is in a better situation than many of the
OECD countries: in Israel, direct taxes constitute “only” 16.9 percent of
the GDP in comparison to an average 20.2 percent for the OECD countries.
The data apparently speaks for itself and is liable to create the
impression that taxes in Israel are not excessive relative to the rest of the
world. However, the data seem to contradict our intuition: anyone who
earns an average salary in Israel knows how difficult it is to support a
family or purchase basic goods and services in comparison to the situation
in Europe and the US. Further evidence can be found in the publications of
consumer organizations, which report that 70 percent of households in
Israel are in overdraft at the bank.
How do we reconcile this data with the findings of the Bank of Israel
research paper? The answer has three components: two relate to the method
of calculation and the third relates to the structure of the Israeli economy.
First, let us analyze the proportion of direct taxes in the GDP, which
stands at 16.9 percent in Israel as compared to 20.2 percent in the OECD
countries. What is unique about direct taxation in Israel is the fact that
relatively few people pay it. As defined by Professor Alvin Rabushka years
ago, one of the criteria of fair taxation is a low tax rate paid by as high a
proportion of the population as possible. This is also known as a “flat tax.”
The tax system in Israel, however, is so distorted that approximately one
half of the population is totally exempt from direct taxes while the other
half pays a very high rate of direct taxation relative to their income. The
Bank of Israels paper pointed out that direct taxes represent approximately
17 percent of the Israeli GDP, but failed to mention that this burden is
borne by only 50 percent of the population. If this rate of taxation were
applied to the whole population, the proportion of direct taxation in the
GDP would rise to over 30 percent (two times 17 percent). If we compare
this figure to the OECD countries with an average of 20 percent of GDP,
we get a better idea of why it is so difficult to make ends meet in Israel.
The second point is indirect taxation which includes various fees,
purchase taxes, value added tax and various other taxes imposed on goods
rather than on income. While the Bank of Israel didnt bother mentioning
indirect taxation, the Ministry of Finance was more thorough. The report of
the State Revenue Administration stated that “the indirect tax burden in
Israel is among the highest in the world, representing 19.6 percent of GDP
in .1998” But why does the Ministry of Finance term this figure to be
“among the highest in the world”? Why not the highest in the world? A
table in the appendix to the State Revenue report compares the proportion
of indirect taxation in the GDP for the industrialized countries. Since the
calculation of indirect taxation is more complicated, the table only
presents figures for 1994 but these are sufficient to create a clear picture:
Proportion of Indirect Taxation in GDP (1994)
Country
Proportion of Indirect
Taxation in GDP
Israel
19.6
Greece
19.4
Denmark
18.1
Austria
16.3
Sweden
15.0
UK
14.2
France
14.1
Canada
14.1
Germany
13.7
Holland
13.0
Belgium
12.9
Italy
11.7
Spain
10.2
US
8.4
Japan
7.9
The third point concerns the concentrated structure of the Israeli
economy and its implications for Israeli citizens. Almost all of the policy
papers published by the Institute of Advanced Strategic and Political
Studies deal with sectors of the economy which are controlled either by
government monopolies or business monopolies which enjoy government
support. The papers show that this level of concentration allows these
monopolies to charge higher prices than would prevail in a competitive
market. Let it suffice to mention that papers have been written on vehicle
insurance, banking, cement, electricity, ports, land and public transportation
(in fact, the list is much longer and includes almost all facets of life in
Israel).
The difference between monopoly and competitive prices is called a
“monopoly tax” and any tax calculation, which ignores this tax, is not
presenting a true picture of the situation in Israel. In most cases, the
“monopoly tax” is paid out of an individuals disposable income. In other
words, after the Israeli has paid income tax, National Insurance, health tax,
purchase taxes, value added tax and various fees, he must pay inflated prices
to the various monopolies.
Thus the next time that a writer at the Jerusalem Post receives a
research paper from the Bank of Israel, he should examine it with a more
critical eye, especially when its conclusions cannot be reconciled with the
general feeling among the Israeli public. It is hard to believe that the
talented economists at the Bank of Israel are unaware of the distorted
calculation of direct taxation, high indirect taxation and monopoly taxes.
However, it is much easier to believe that an economist who is paid by the
government may not be inclined to be overly critical of its actions.