Study: Negative income tax law won't cut poverty

from the Jerusalem Post

Following the Knesset's approval to institute an income tax policy aimed at closing the widening social gaps, new research released Wednesday argued that the measure would affect only 2.2 percent of the poor and reduce poverty by less than half a percent.

"The implementation of the government's negative income tax law is not a sufficient solution for the poverty problem in Israel and it therefore needs to be complemented by further steps," said Dr. Roby Nathanson, director of the Macro Center for Political Economy, who edited the research carried out by the Zichron Yaacov Forum and the Friedrich-Ebert-Stiftung Israel. "Only 2.2% of those entitled to the income-tax credit are poor families."

On Tuesday, the Knesset approved an income-tax credit for the country's poorest, as well as a rate reduction for middle-income earners, as it seeks to lift 1% of the population out of poverty each year through 2010 and to increase the percentage of working age Israelis in the labor force to 71% from 68%. The new law entitles people earning less than 45% of the minimum wage, currently NIS 1,725 a month, to a payment from the government. Lawmakers also approved cutting the tax rate for people earning between NIS 4,271 and NIS 16,380 a month by between two and four percentage points by 2010.

The research study, which analyzed the direct and immediate impact of the proposed negative income tax law on the situation in the employment market, shows that in the immediate-term, only 8,000 families (out of 470,000 poor families), or 37,000, persons would be lifted out of the poverty trap. As such, implementation of the law would reduce the poverty rate among families by only 0.41% from 20.65% to 20.24%.

The Finance Ministry estimated that tax cuts, which will gradually take effect in 2008 and 2009, for middle-income earners would cost it NIS 3.2b. while added taxes on company-provided cars would add NIS 2.2b. in extra income. The added tax on the value of cars provided by companies for their employees will gradually rise until 2011.

According to the figures, the research study stated, the current negative income tax plan would cost the government NIS 1.1b. a year in the immediate-term and provide credits for about 420,000, which represent 15.3% of the labor force and 16.8% of the employed.

Nathanson added that due to the minor impact of the current negative income tax law, a number of steps needed to be adopted to complement the law as also has been suggested previously by the Bank of Israel.

The adjustments to instituting a negative income tax are part of a program of grants under which working families with two children would get a credit of 20 agorot for each shekel above income of NIS 1,000 and below NIS 3,500. At an income of NIS 3,500, a maximum benefit of NIS 500 would be granted while above NIS 3,500 earners, would have 33 agorot subtracted from the maximum benefit for each additional shekel up to the next salary ceiling of NIS 5,000.

Families with three children would get a credit of 30 agorot for each shekel above the income of NIS 1,000 and the upper ceiling of NIS 4,000, at which a maximum benefit of NIS 900 would be granted.

Bloomberg contributed to this report.