Taxing Wages 2018

Israel

Abstract

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.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

 

 

The Israeli currency is the Israeli Shekel (ILS). In 2017, ILS 3.60 was equal to USD 1. In that year, the average worker in Israel earned ILS 147 984 (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. Until 2014, the conditions for interdependence involved situations where one spouse worked in a business which the other spouse either owned or had certain levels of capital or management/voting rights. Since 2014, spouses could still be taxed separately, even in cases where their earned income is deemed to be interdependent, if the labour of both spouses is needed to run the business and their income is commensurate to their effort.

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 2 580 in 2017.

• Basic credit: Every resident taxpayer is entitled to 2.25 credit points (ILS 5 805 in 2017).

• Additional credit for women: Women are entitled to a further half credit point (ILS 1 290 in 2017).

• 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 2 580 in 2017). In 2012 this credit was increased to 2 credit points per child aged under 5 (ILS 5 160 in 2017). Since 2012, married working fathers with children aged under 2 are also entitled to 2 credit points per child. For the years 2017-18, the credit for both parents was temporarily increased to 2.5 credit points per child aged under 5. Since, according to the Taxing Wages methodology, the children in the model are between 6 and 11 inclusive, this change wasn’t included in the model.

• Single parent credit: Single parents (male or female) are entitled to one additional credit point (ILS 2 580 in 2017).

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 2017, a comprehensive reform was implemented, where the average credit was decreased but the number of beneficiaries more than doubled. In 2017 the credits range from 7 % in the lowest category to 20% in the highest category with ceilings of ILS 132 000 and 241 080 respectively. About 20% 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 2017 is as follows:

 

Taxable income (ILS)	Tax rate ( % )
0-74 640	10
74 640-107 040	14
107 040-171 840	20
171 840-238 800	31
238 800-496 920	35
496 920-640 000	47
Above 640 000	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 5 804 per month in 2017).

• 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 2017).

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 2017 are as follows:

 

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 2017 are as follows:

 

Insurance branch	Full rate contribution ( % )	Reduced rate contribution ( % )
Total for National Insurance branches	7.50	3.45
Health	-	-
Total contributions	7.50	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% on the wage-bill on the non-profit sector including Government,

• Wage tax on the financial institutions: the VAT law also imposes a 17.00% 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.

Moreover, the government will 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 instalments in January 2017-December 2019. Considering the delay of cash payments, i.e. until the child turns 18, they do not benefit the household, but rather only the child and therefore they aren’t included in the Taxing Wages modelling for 2017.

 

	Children born before 1 June 2003	Children born on or after 1 June 2003
First child	150	150
Second child	188	188
Third child	188	188
Fourth child	336	188
Fifth child and above	354	150

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 2017, the grant per child was ILS 1 003.

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. In 2017 some tax rates and the width of some tax brackets were changed, effectively decreasing the tax burden for low and mid income while increasing the burden for higher incomes.

• 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 7.5% in January 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. In December 2015 (retroactively from May 2015) the allowance for all children were increased.

• As a temporary measure for 2017 and 2018, the tax credit for both parents was increased to 2.5 credit points per child aged under 5.

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.

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.

 

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 January 2017 was 18.5 per cent of the employee’s salary (up to the level of the average wage of ILS 9 673 per month), about 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 2 050 per month (about 43% of the minimum wage) but not more than ILS 6 170 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 470.

Since 2016, single parents are eligible for the EITC for a wider income range – from ILS 1 270 per month to ILS 9 360 per month (for a single parents of 1-2 children) or ILS 11 400 per month (for a single parents of 3 or more children).

Since 2013 (based on earnings in 2012), these sums were increased by 50% for working mothers (and fathers in one-parent family).

A proposal not yet legislated will expand the 50% bonus to all working fathers and add a further bonus of 30% for families where both parents work. This was not included in the Taxing Wages modelling for 2017

Families in which both parents work, and their joint income does not exceed ILS 11 860, 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.

Israel

2017 parameter values

Average earnings/yr	Ave_earn	147 984	Secretariat estimate
Income tax	Tax_sch	0.10	74 640
		0.14	107 040
		0.20	171 840
		0.31	238 000
		0.35	496 920
		0.47 0.50	640 000
Employees SSC	SSC_sch	0.035	69 648
		0.12	518 880
		0
Employers SSC	SSC_rate2	0.0345	69 648
		0.0750	518 880
		0.0000
Child benefit	CB_firstchild	1 800
	CB_secondchild	2 256
	Studygrant_rate	1 003
Wastable tax credits
Basic element	WTC_Basic	5 805
Lone parent	WTC_lone	2 580
Parents/per child	WTC_Child	2 580
Women	WTC_woman	1 290
Negative Income tax
Married with 1 or	NIT_sch1	0	24 600
2 children		0.161	42 708
		7.051	42 720
		0	56 880
		-0.23	74 040
Married with 3 or	NIT_sch2	0	24 600
more children		0.235	42 472
		0	42 720
		0	56 880
		-0.235	81 120
Single with 1 or	NIT_sch3	0	15 240
2 children		0.108	42 708
		2.788	42 720
		0	80 160
		-0.116	112 320
Single with 3 or	NIT_sch4	0	15 240
		0.155	42 337
		0	42720
		0	89 520
		-0.116	136 800
	NIT_basic1	960
	NIT_basic2	1 440
	NIT_min	240
	NIT_MinIncome1	24 600
	NIT_MinIncome2	15 240
	Nit_AddIncome1	17 040
	Nit_AddIncome2	56 880
	Nit_MaxIncome	142 320
	NIT_Bonus	1.50
Days in tax year	numdays	366

2017 tax equations

 

	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,IF(Children=0,0,IF(Married=1,IF(Children<=2,NIT_basic1*(Princ_earnings>NIT_MinIncome1)+Tax(Princ_earnings,NIT_sch1),NIT_basic2*( Princ_ earnings>NIT_MinIncome1)+Tax(Princ_earnings,NIT_sch2)),(IF(Children<=2,NIT_basic1*( Princ_earnings >NIT_MinIncome2)+Tax(Princ_earnings,NIT_sch3),NIT_ basic2*( Princ_earnings >NIT_MinIncome2)+Tax(Princ_earnings,NIT_sch4)))))) NIT=+MAX(0,NIT+IF(Children=0,0,IF(Children<=2,-0.23,-0.235)) *MAX(0,+( Princ_earnings +Spouse_earnings)-NIT_MaxIncome-MIN(MAX(0, Princ_earnings -NIT_Addincome2),NIT_AddIncome1)-MIN(MAX(0,Spouse_ earnings-NIT_Addincome2),NIT_AddIncome1))) NIT=IF(NIT<NIT_min,0,NIT)*IF(Married=1,1,NIT_Bonus)
		NIT_spouse	B	NIT=MAX(0,IF(Children=0,0,IF(Married=1,IF(Children<=2,NIT_basic1*(Spouse_earnings>NIT_MinIncome1)+Tax(Spouse_earnings,NIT_sch1),NIT_basic2*(Spouse_earnings>NIT_MinIncome1)+Tax(Spouse_earnings,NIT_sch2)),(IF(Children<=2,NIT_basic1*(Spouse_earnings>NIT_MinIncome2)+Tax(Spouse_earnings,NIT_sch3),NIT_basic2*(Spouse_earnings>NIT_MinIncome2)+Tax(Spouse_earnings,NIT_sch4)))))) NIT=+MAX(0,NIT+IF(Children=0,0,IF(Children<=2,-0.23,-0.235)) *MAX(0,+( Princ_ earnings +Spouse_earnings)-NIT_MaxIncome-MIN(MAX(0, Princ_earnings -NIT_ Addincome2),NIT_AddIncome1)-MIN(MAX(0,Spouse_earnings-NIT_Addincome 2),NIT_AddIncome1))) NIT=IF(NIT<NIT_min,0,NIT)*NIT_Bonus
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.