Chapter. Israel

This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.

Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.

  
Table 1117.

picture

Table 1118.

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The Israeli currency is the Israeli Shekel (ILS). In 2015, ILS 3.8869 was equal to USD 1. In that year, the average worker in Israel earned ILS 137 958 (Secretariat estimate).

1. Personal income tax system

1.1. Central government income tax

1.1.1. Tax unit

In general, spouses are taxed separately on their earned income, subject to the condition that its sources are independent. The household is taxed jointly if their earned income is deemed to be interdependent. The conditions for interdependence involve situations where one spouse works in a business which the other spouse either owns or has certain levels of capital or management/voting rights.

1.1.2. Tax allowances and credits

1.1.2.1. Standard tax credits

The standard tax credits are given in the form of credit points subtracted from the tax liability. Each point is worth ILS 2 616 in 2015.

  • Basic credit: Every resident taxpayer is entitled to 2.25 credit points (ILS 5 886 in 2015).

  • Additional credit for women: Women are entitled to a further half credit point (ILS 1 308 in 2015).

  • Child credit: Working mothers (and fathers in one parent families) with children aged under 18 are entitled to one additional credit point per child (ILS 2 616 in 2015). In 2012 this credit was increased to 2 credit points per child aged under 5 (ILS 5 232 in 2015). Since 2012, married working fathers with children aged under 2 are also entitled to 2 credit points per child.

  • Single parent credit: Single parents (male or female) are entitled to one additional credit point (ILS 2 616 in 2015).

1.1.2.2. Non-standard tax credits applicable to income from employment

  • Tax credits are awarded for contributions to approved pension schemes, up to a ceiling which varies according to the employee’s circumstances.

  • Employees living in certain development areas or in conflict zones receive credits as a percentage of their income up to ceiling. In 2015 the credits range from 10 % in the lowest category to 22% in the highest category with ceilings of ILS 160 560 and 241 080 respectively. About 9% of the population lives in these areas.

  • New immigrants are entitled to three additional credit points in their first eighteen months in Israel, two additional credit points in the following year, and one credit point in the year after.

  • Discharged soldiers receive 2 credit points for three years after the completion of at least 23 months of service or 1 credit point for a shorter service.

  • Graduates of academic studies receive 1 credit point for three years after the completion of a B.A. degree (or after the completion of 1 700 study hours that led to a professional certificate) and 0.5 credit point for two years after the completion of a M.A. degree.

1.1.3. Tax schedule

The tax schedule for earned income in 2015 is as follows:

Table 1119.

Taxable income (ILS)

Tax rate ( % )

0-63 240

10

63 240-108 000

14

108 000-167 880

21

167 880-239 760

31

239 760-501 480

34

501 480-810 720

48

Above 810 720

50

1.2. Regional and local income tax

There are no regional or local income taxes.

2. Compulsory social security insurance system

Social security contributions are made up of a combination of those for National Insurance and Health Insurance. The tax rates paid by employees and employers are applied in two brackets:

  • A reduced rate for income up to a level of 60% of the average wage per employee post (ILS 5 556 per month in 2015).

  • A full rate for income exceeding 60% of the average wage per employee post and up to a level of around 5 times the average wage per employee post (ILS 43 240 per month in 2015).

2.1. Employees’ contributions

The taxable base for social security insurance contributions paid by employees is the total amount of the gross wage or salary including fringe benefits. The assessment period is the calendar month. The effective employees’ contribution rates in 2015 are as follows:

Table 1120.

Insurance branch

Full rate contribution ( % )

Reduced rate contribution ( % )

Total for National Insurance branches

7.00

0.40

Health

5.00

3.10

Total contributions

12.00

3.50

2.2. Employers’ contributions

Social security insurance contributions are also paid by employers on behalf of their employees. These relate to National Insurance only – employers do not pay any contributions for health insurance.

The employers’ contribution rates in 2015 are as follows:

Table 1121.

Insurance branch

Full rate contribution ( % )

Reduced rate contribution ( % )

Total for National Insurance branches

7.25

3.45

Health

   –

   –

Total contributions

7.25

3.45

3. Payroll taxes

The following payroll taxes exist in Israel but neither of them is included in the modelling as they have limited coverage:

  • Wage tax on the non-profit institutions: the VAT law imposes a 7.5 per cent on the wage-bill on the non-profit sector including Government,

  • Wage tax on the financial institutions: the VAT law also imposes a 18 per cent tax on the wage-bill of the financial institutions.

4. Universal cash transfers

4.1. Transfers related to marital status

None.

4.2. Transfers for dependent children

A monthly child allowance is paid to the parent (usually the mother) of unmarried children aged up to 18. The amount of the entitlement for each child depends on the date of birth of the child. Between August 2003 and June 2009, all children born after 1 June 2003 received the same benefit as the first child. But, according to the Coalition agreement signed in March 2009, the benefits for the second, third and fourth child (including those born after June 2003) were increased gradually over a period of four years (i.e. from 2009 to 2012). In August 2013 the allowance for all children born after June 2003 were decreased to ILS 140 per month per child.

In December 2015 (retroactively from May 2015) the allowance for all children were increased.

In 2015 the monthly payments per child are shown in the following table. The ”average” figure is used in the modelling.

Table 1122.

Children born before 1 June 2003

Children born on or after 1 June 2003

Average

Jan-Apr

May-Dec

Average

Jan-Apr

May-Dec

First child

146.67

140

150

146.67

140

150

Second child

172.00

140

188

172.00

140

188

Third child

182.67

172

188

172.00

140

188

Fourth child

336.00

336

336

172.00

140

188

Fifth child and above

354.00

354

354

146.67

140

150

Moreover, the government will open a closed saving account for each child and deposit  ILS 50 per child per month, starting with May 2015. The savings will be liquid only at the age of 18. However, the actual deposit for the period May 2015-December 2016 will be only delivered in 36 equal installements in January 2017-December 2019. This element is not included in the Taxing Wages modelling for 2015.

In addition a Study Grant is paid to lone parents with children aged 6 to 14. The grant is paid in one instalment, usually in September at the beginning of the school year. In 2015, the rates of grant per child were ILS 1 557 and ILS 865 respectively for children aged 6-11 and 12-14.

5. Main changes in the tax and benefit systems since 2002

  • There has been a policy of gradually reducing the level of personal income taxes since 2003. This policy was expected to continue till 2016 but came to an end in 2012 with the top tax bracket increasing from 45% to 48% although the rate of one middle income tax bracket was further decreased from 23% to 21%. The rates were further increased in 2013. In 2013 a surtax of 2% was imposed on total income above ILS 811 560, effectively increasing the top marginal rate to 50 %. In 2013 the value of some tax brackets weren’t fully indexed to the CPI and even suffered a nominal decrease. In 2014 the value of all tax brackets and of the ”credit point” weren’t indexed to the CPI.

  • The full contribution rate for employee social security contributions was increased gradually from 9.7% in 2002 to 12% in 2006. The reduced contribution rate was lowered from 5.76% in 2002 to 3.5% in 2006. The upper threshold for contributions was removed in July 2002 but re-instated one year later. In August 2009, as a temporary measure until December 2011, it was increased to 10 times the average wage per employee post until December 2010 and to 9 times the average wage per employed post until December 2011.

  • Prior to July 2005, there was only one contribution rate for employer social security contributions and this was set at 5.93% between July 2002 and June 2005. The upper threshold for contributions was removed in July 2002 but was re-instated one year later. The current system of two tax brackets was introduced in July 2005 with a reduced contribution rate of 5.33% and a full rate of 5.68%. There has been a lowering of rates in each year between 2006 and 2009. In August 2009, as a temporary measure until March 2011, the reduced rate was increased from 3.45% to 3.85%. In April 2011 the regular rate was increased to 5.9%. It was increased again to 6.5% in January 2013, 6.75% in January 2014, 7.25% in January 2015 and will continue to increase to 7.5% in 2016.

  • The Employers tax on wage bill of the non-profit sector excluding Government was abolished in 2008.

  • In the period between August 2003 and June 2009, all children that were born on or after 1 June 2003 received the same level of benefit payment as the first child. The 2009 Coalition agreement introduced a gradual increase in the benefit payments for the second, third and fourth children in all families (including those where children were born after June 2003) over a period of four years from July 2009 to Apr 2012. In August 2013 the allowance for all children born after June 2003 was decreased to ILS 140 per month per child.

6. Memorandum items

6.1. Average gross annual wage earnings calculation

The average wage figures represent the amount earned for a full time post by employees working 35 hours per week or more. Until 2011 the AW data came from a combination of 2 sources - the income and expenditure survey and the labour force survey. Since 2012 the data come exclusively from the income and expenditure survey as the labour force survey has no more data on income. The Central Bureau of Statistics has now computed a new AW series based exclusively on the income and expenditure survey back from 2000.

The 2014 and 2015 data used in the modelling are estimates.

As to the economic classification, until 2012, Israel used a modified version of ISIC 3 where the B-I industries (see Table below) are a very close equivalent of C-K industries in ISIC 3.1. Israel’s Central Bureau of Statistics adopted ISIC 4 in 2012 and since 2013 the Average Wage used in the modelling is based on ISIC 4.

Table 1123.

A

Agriculture.

B

Manufacturing.

C

Electricity and water supply.

D

Construction (building and civil engineering projects).

E

Wholesale and retail trade and repairs.

F

Accommodation services and restaurants

G

Transport, storage and communication.

H

Banking, insurance and other financial institutions.

I

Business activities.

J

Public administration.

K

Education.

L

Health, welfare and social work services.

M

Community, social, personal and other services.

6.2. Employer contributions to private pension

Until 2007 employers were not legally obliged to pay into a pension plan for their employees. Pension rights were guaranteed in collective agreements that covered less than half of the labour force. About one million employees in Israel had no pension arrangement (mainly those earning a relatively low wage, temporary workers and those working for subcontractors).

In 2008, a compulsory employment pension was introduced for employees with a period of employment of at least 6 months. The minimum rate of contributions in 2015 is 17.5 per cent of the employee’s salary (up to the level of the average wage of ILS 9 260 per month), one third to be paid by the employee and two thirds by the employer.

6.3. Earned income tax credit

A non-wastable earned income tax credit was implemented in 2008 in selected geographical areas of Israel covering 15 % of the population. Entitlement to this credit is established based on earnings in the previous year. The tax credit was extended to all areas of Israel in 2012 (based on the earnings in 2011 and therefore we already included it in the 2011 version of the model). For mothers of children up to the age of 2 and for single parents the full coverage started in 2011 (based on earnings in 2010).

Under the law, workers aged 23 or more who are parents of one or two children aged less than 18 (or workers aged 55 or more even without children), and earn at least ILS 2 100 per month (about 45 per cent of the minimum wage) but not more than ILS 6 330 per month are eligible for a monthly increment of up to ILS 330. The corresponding figure for a family with 3 or more children is ILS 490. Since 2013 (based on earnings in 2012), these sums were increased by 50% for working mothers (and fathers in one-parent family). Families in which both parents work, and their joint income does not exceed ILS 12 180, are entitled to these benefits for each wage-earner. The grant is paid four times a year directly into the account of the eligible persons.

Table 1124. 2015 parameter values

Average earnings/yr

Ave_earn

137 958

(Secretariat estimate)

Income tax

Tax_sch

0.10

63 240

 

 

0.14

108 000

 

 

0.21

167 880

 

 

0.31

239 760

 

 

0.34

501 480

 

 

0.48

0.50

810 720

Employees SSC

SSC_sch

0.035

66 672

 

 

0.12

518 880

 

 

0

 

Employers SSC

SSC_rate2

0.0345

66 672

 

 

0.0725

518 880

 

 

0.0000

 

Child benefit

CB_firstchild

1 760

 

 

CB_secondchild

2 064

 

 

Studygrant_rate

1 557

 

Wastable tax credits

 

 

 

Basic element

WTC_Basic

5 886

 

Lone parent

WTC_lone

2 616

 

Parents/per child

WTC_Child

2 616

 

Women

WTC_woman

1 308

 

Negative Income tax

 

 

 

Family with 1 or

NIT_sch1

0

25 200

2 children

 

0.161

43 088

 

 

0

43 800

 

 

0

58 440

 

 

-0.23

75 960

Family with 3 or

NIT_sch2

0

25 200

more children

 

0.235

43 788

 

 

5.985

43 800

 

 

0

58 440

 

 

-0.235

83 280

 

NIT_basic1

1 080

 

 

NIT_basic2

1 440

 

 

NIT_min

240

 

 

NIT_MinIncome

25 200

 

 

NIT_MaxIncome

146 160

 

Nit_AddIncome

17 520

NIT_Bonus

1.50

Days in tax year

numdays

366

 

2015 tax equations

Table 1125.

Line in country table and intermediate steps

Variable name

Range

Equation

1.

Earnings

earn

2.

Allowances:

Tax_al

B

0

3.

Credits in taxable income

taxbl_cr

B

0

4.

CG taxable income

tax_inc

B

Earn

5.

CG tax before credits

CG_tax_excl

B

Tax(tax_inc, tax_sch)

6.

Tax credits (nonwastable):

Principal

tax_cr_princ

B

(earn>0)*(wtc_basic+(IF(married=0)*(children>0),wtc_woman+wtc_lone+(wtc_child*children))

Spouse

tax_cr_spouse

B

(earn>0)*(wtc_basic+wtc_woman+(wtc_child*children))

Tax credits (nonwastable)

NIT_princ

B

NIT=+MAX(0, MAX(0,+IF(princ_earnings<NIT_MinIncome,0,IF(Children=0,0,IF (Children<3,NIT_basic1+Tax(princ_earnings ,NIT_sch1),NIT_basic2+Tax(princ_ earnings,NIT_sch2)))))+NIT_sch1_rate5*MAX(0,+( princ_earnings + spouse_ earnings)-NIT_MaxIncome-MIN(MAX(princ_earnings - NIT_sch1_inc4,0),( NIT_ AddIncome))-MIN(MAX(spouse_earnings - NIT_sch1_inc4,0),( NIT_ AddIncome))))IF(NIT<NIT_min,NIT=0,NIT)*if((married=0)*(children>0)=1,NIT_Bonus,1)

 

NIT_spouse

B

NIT=+MAX(0, MAX(0,+IF(spouse_earnings<NIT_MinIncome,0,IF(Children= 0,0,IF(Children<3,NIT_basic1+Tax(spouse_earnings ,NIT_sch1),NIT_basic2+ Tax(spouse_earnings,NIT_sch2)))))+NIT_sch1_rate5*MAX(0,+( princ_earnings + spouse_earnings)-NIT_MaxIncome-MIN(MAX(princ_earnings - NIT_sch1_inc4,0), ( NIT_AddIncome))-MIN(MAX(spouse_earnings - NIT_sch1_inc4,0),( NIT_ AddIncome)))) IF(NIT<NIT_min,NIT=0,NIT)* if((children>0)=1,NIT_Bonus,1)

7.

CG tax

CG_tax

B

Positive(CG_tax_excl-tax_cr)-NIT

8.

State and local taxes

local_tax

B

0

9.

Employees’ soc security

SSC

B

Tax(earn, SSC_sch)

11.

Cash transfers

cash_trans

J

IF(children=1,CB_firstchild,IF(Children=2,CB_firstchild+CB_secondchild)+(IF(married=0)*(children>0),Studygrant_rate*children)

13.

Employer’s soc security

SSC_empr

B

Tax(earn, SSC_rate2)

Key to range of equation B calculated separately for both principal earner and spouse P calculated for principal only (value taken as 0 for spouse calculation) J calculated once only on a joint basis.