Who's going to get hit hardest? (Illustration)
The value-added tax rose to 17% on Saturday, portending further increases in the prices of most commodities. The 1% tax hike marked the execution of the second phase of the government's economic measures, which are meant to stabilize Israel's economy.
The rising prices will be particularly felt at the gas pumps, where a liter of petrol is expected to cost 7.14% more by Sunday – not only due to the VAT hike but also because of the mounting cost of oil.
- Gas prices to reach record high
- Lateral cuts expected for State budget
- Treasury mulls raising VAT rate
The next phase in the economic plan is to go into effect early in 2013, when the income tax will go up by 1% for the top three tax brackets.
The measures will most significantly burden the middle class, which is comprised of individuals who make between NIS 7,500 (roughly $1,850) and NIS 15,000 ($3,700) a month and do not receive any breaks or benefits from the State. This sector is to pay more for commodities while handing over more of their incomes to the State.
According to data released by the Knesset's Information and Research Center at the end of last year, the 5th-8th income deciles pay 17% of the State's direct taxes (income tax, social security and real estate taxes), as well as 43% of its indirect taxes (VAT, gas excise tax, import taxes and property taxes, among others.)
Top earners hit hardest?
However, an expert economist said that the Israel's top earners are the ones being hit hardest by the country's tax system.
"Those who pay taxes in Israel are the top three deciles, and the tax burden is very high for them, especially considering what they get," said Professor Omer Moav, an economist for the Hebrew University of Jerusalem and Warwick University.
Moav, who served as an adviser to Finance Minister Yuval Steinitz in the beginning of his term, asserted that the funds fail to make it back to the sectors who shoulder most of the tax burden.
"Every time you talk about the environment or the quality of life, it sounds like a luxury. They tell you, 'How can you talk about bicycle lanes while we're struggling to make a living?' But the top echelon pays taxes as though it is living in Denmark.
"The biggest fraud is when they say that the tax burden is low… but the topmost decile pays a lot. And what does it get in return?" he pondered.
Moav said that while the current government appears to observe budgetary restraint and low taxation, it is in fact implementing frivolous and populist policies.
"We have a prime minister whose agenda is to cut expenses and lower taxes, but he does just the opposite," he said. "Before Netanyahu's government came into power, the budget growth was at 1.7%, and he increased it by 2.6%."