Israel Finance Ministry, International Division

Excerpts from the
Annual State Revenue Report for 1997

INTERNATIONAL COMPARISONS

	INTRODUCTION
	DIRECT TAXES
	INDIRECT TAXES

1. INTRODUCTION

This chapter subjects Israel's tax system to an international comparison. The more the Israeli economy integrates itself into the world economy, the greater the need to obtain information on other countries' tax systems and to align the Israeli system with various developments in taxation around the world.

Our international comparison shows that Israel has a tax burden of 40 percent of GDP as against an average of 42.5 percent in the European Common Market countries and 38.4 percent in the OECD countries (see Table XVI-8). Israel's direct-tax burden has a notably narrow base, relatively speaking, because of a proliferation of exemptions, a rather high tax threshold, and steep increase in marginal tax rates-the highest tax bracket beginning at a rather low level of income. In contrast, indirect taxation, as a percent of GDP, is higher in Israel than in most industrialized countries because Israel's VAT is not low, applied at a uniform rate, and imposed on a very broad base. Additionally, especially high purchase taxes are applied to real estate.

Comparison of the full range of taxes that apply to taxpayers elicits a complex picture that makes it hard to quantify matters and decide with certainty where taxes are higher. One must see where the tax system fits into each country's overall fiscal policy and historical, social, and economic developments. These factors have a large impact on the tax bases, tax rates, and the very existence of a given tax in each country. For these reasons, one should be careful when engaging in inter-country comparisons of any individual component of the tax system and refrain from drawing hasty conclusions on such a basis. Nevertheless, when the full range of parameters is examined, one can definitely obtain a picture that facilitates inter-country comparison.

This chapter omits several international comparisons that we addressed in the past, for lack of up-to-date data on quite a few of the countries being compared. These comparisons may be found in previous reports of the State Revenue Administration.

Table XVI-1 presents international comparison of per-capita Gross National Product, per-capita Gross Domestic Product, and Gross National Product in terms of Purchasing Power Parity. The average price level in the comparison countries, relative to that in the United States, is also derived from the table. The table shows that in per-capita GNP, adjusted to Purchasing Power Parity for 1995, Israel trailed Sweden and outperformed Ireland, Spain, New Zealand, Greece, and Portugal, much as it did in 1994. The purchasing power of one U.S. dollar is 3.6 percent greater in Israel than in United States. The world's most "expensive" countries include Japan and Switzerland.

2. DIRECT TAXES

A. General

The direct taxes that taxpayers pay are a function of the rates of income tax, social insurance (in Israel: National Insurance) contributions, and taxes levied by local authorities. They are also affected by miscellaneous tax benefits and the way taxpayers file their returns (separately or jointly).

B. Tax Threshold

The tax threshold is the income level up to which no income tax is paid. The threshold is affected by the absolute income level, deductions and exemptions, the structure and rates of the tax brackets (all of which determine one's tax liability), and tax credits. The tax threshold affects the tax base, which, in turn, is affected by additional variables such as the extent of tax exemptions and reductions. Israel's high tax threshold, relative to countries in the comparison, seriously increases the tax burden of taxpayers whose tax rates exceed the threshold.

The comparison in Table XVI takes into account, apart from tax brackets and rates, only standard deductions and standard credits (given to all taxpayers) and those derived from the taxpayer's personal status and family size. The comparison sheds stronger light on Israel's high tax threshold for individuals, couples with children and non-working wives, and couples with children and working wives. Another salient fact is that the Israel tax threshold is four times higher, if not more, than that of the U.S. for all types of taxpayers. In comparison with United Kingdom and Germany, Israel's tax threshold is slightly higher for couples with two children and twice as high for individuals. Moreover, only Israel among the countries in the comparison has a higher tax threshold for individuals than for couples with or without children.

C. Tax Brackets

Table XVI-3 presents tax brackets in Israel, United States, and United Kingdom, as a percent of per-capita GDP. The distance between the lowest bracket and the beginning of the highest bracket expresses the "spread" of the brackets. Among the countries compared, the United States has the widest spread (from 81.7 percent of per-capita GDP to 898.7 percent) and the United Kingdom has the narrowest (from 30.2 percent to 192.2 percent), but the highest tax rate is 40 percent in the U.K. as against 50 percent in Israel and 47.19 percent in United States.

D. Tax Rates

Table XVI-5 presents the maximum marginal personal income-tax rates in various countries. The inter-country comparison shows that in 1985-1997, the marginal tax rate in all countries including Israel declined (see Table XVI-5). With respect to corporate tax, for which the comparison pertains to 1984-1997 (see Table XVI-6), the tax rates decreased during the period all told, but in most countries they began to rise in the past few years-except in Israel, where the rate descended to 36 percent in 1996.

E. Social Insurance

Social security contributions (known in Israel as National Insurance) are included in direct taxation (in most cases they apply only to individual taxpayers and their employers) and differ in incidence from country to country. Contributions are usually made up to an income ceiling and are partly deductible from income tax. Israel-which charges social security contributions at a reduced rate of at 2.66 percent up to half of the national average wage and 4.9 percent up to four times the national average wage-is noted for a relatively low rate of social-insurance contributions. Employers' contributions range from 3 percent in United Kingdom to 45 percent in Italy.

Most countries invoke a tax ceiling and recognize social security contributions as deductible expenses for income-tax purposes.

Israel, the United Kingdom, Italy, and Sweden provide national health insurance. In United States, only citizens aged 65 and over have this benefit.

In all countries shown in Table XVI-4, social insurance makes up a large portion of the pension provision. The level of pension in European countries is commensurate with the employee's contributions to social insurance during his or her working years (i.e., one's pension is a function of one's income level). In Israel, no linkage is made between old-age pension and prior income.

In most countries in the comparison except for United States, social insurance includes unemployment compensation. The U.S. does not offer such compensation, but transfers are made to a fund that provides the unemployed with temporary relief.

Summing up, the levels of social insurance coverage and contributions vary from country to country (depending on how the concept of "welfare state" is perceived) and the concurrent development of public support systems. Social insurance usually includes some element of pension; most countries in the comparison offer health insurance but not always with full coverage.

F. Local Authorities

Income tax applied by local authorities reflects a division of fiscal powers between central and local government. Local authorities' own sources of money are a substitute for budget transfers from the central government. In Israel and the United Kingdom, local income tax is not imposed. The other countries in the comparison do have local income taxes, at rates from 1 percent in several U.S. states to 31 percent in Sweden. In several countries, such as United States, local income tax is deductible from the central-government income-tax; other countries, such as Sweden, Germany, and Italy, do not recognize it as such.

G. Tax Calculation and Filing

In the United States, married taxpayers may choose to file jointly, separately, or as heads of household. Each method comes with different tax brackets; taxpayers choose the method best suited to them. The choice is affected by the income level of the taxpayer and of his/her spouse. In Germany, both spouses' incomes are included in the calculation and the tax brackets are doubled, thereby reducing the taxation of households as against two individuals with the same total income who have file separately. Most Israelis file their taxes separately except where two spouses derive their income from a common source. (See Table XVI-4.)

3. INDIRECT TAXES

A. Value Added Tax

VAT in Israel was 17 percent in 1997. (See Table XVI-9.)

The average rate of VAT in the European Common Market countries in 1997 was 17.9 percent, ranging from 15 percent in Germany and Luxembourg to 25 percent in Denmark and Sweden. In Europe, it is a widespread practice to subject different product groups to different rates of VAT.

B. Taxation of Gasoline

In 1997, gasoline in Israel was taxed at 69.3 percent of the consumer price, including excise and VAT (Table XVI-10). This tax rate is low in comparison to Europe, where the average tax rate was 73.4 percent in 1997. The average consumer price of gasoline Israel in 1997 was $0.96 per liter, under the European average of $1.06.

C. Taxation of Cigarettes

Taxation of cigarettes, defined as the fraction of tax in the price of a pack of Marlboro cigarettes (including purchase tax and VAT), was 70 percent in Israel at the end of 1997 (Table XVI-11). The average rate in the European Common Market countries at that time was 75 percent, ranging from 69 percent in Luxembourg, Germany, and Sweden to 82 percent in Denmark.

Table XVI-1
Comparison of Per-Capita GNP and Purchasing Power, Selected Countries, 1995,
and Per-Capita GDP in 1996 (Current US$)

Country	Per-capita GNP, 1995	Per-capita GNP, Purchasing Power Parity in 1995¹	Per-capita GNP, 1996	Differences in purchasing power of $1²
United States	26,980	26,980	28,646	100.0
Switzerland	40,630	25,860	41,632	63.6
Japan	39,640	22,110	36,575	55.8
Norway	31,250	21,940	36,028	72.0
Belgium	24,710	21,660	26,548	87.7
Austria	26,890	21,250	28,988	79.0
Denmark	29,890	21,230	33,125	71.0
Canada	19,380	21,130	20,641	109.0
France	24,990	21,030	26,372	84.2
Germany	27,510	20,070	28,720	73.0
Netherlands	24,000	19,950	22,938	83.1
Italy	19,870	19,870	21,155	104.5
United Kingdom	18,700	19,260	19,891	103.0
Australia	18,720	18,940	21,385	101.2
Sweden	23,750	18,540	28,308	78.1
Israel	15,920	16,490	16,732	103.6
New Zealand	14,340	16,380	17,979	114.1
Ireland	14,710	15,680	18,824	106.6
Spain	13,580	14,520	14,809	106.9
Portugal	9,740	12,670	10,882	130.1
Greece	8,210	11,710	11,713	142.6
Syria	1,120	5,210	-	475.0
Algeria	1,600	5,300	1,438	331.3
Tunisia	1,820	5,000	2,165	274.7
Jordan	1,510	4,060	1,285	268.9
Egypt	790	3,820	1,112	483.5

Sources: World Bank, World Development Bank-1995; IMF, International Finance Statistics.

Notes to the table:

1.	Per-capita GNP in terms of Purchasing Power Parity is computed in PPP for all countries. The relative purchasing power in all countries in the series is relative to that in the United States.
2.	Differences in the purchasing power of the dollar are computed by dividing the column of per-capita GNP in international prices by the column of per-capita GNP. In countries where the index exceeds 100 percent, prices are lower than in the United States; where the rate is under 100 percent, prices are higher than in the U.S. All data for Austria, Belgium, and Tunisia, are for 1995.

Table XVI-2
Tax Threshold as Percent of Per Capita GDP, Selected Countries, 1997

Country	Individual	Couple with no children¹	Couple with two children²	Remarks
United States	8.8	17.6	12.1	Personal deduction of $2,650 and $500 deduction for each child
United Kingdom	29.8	43.2	43.0	Personal deduction of £ 4,405 + £ 1,830 for couple. After age 65, the deduction rises and the threshold rises commensurably.
Switzerland³	0	5.1	18.4	Deduction from income for each child up to age 18-SF 4,700. Deduction for income for employee whose wife earns low income. Level of deduction for wife-2,600-5,900 francs per year. No other personal deductions.
Sweden	4.5-35.5	4.5-35.5	4.5-35.5	Deduction of 8,600 krona of per year up to income of 67,300 per year. Deduction rises commensurate with income to 110,000 per year (at this income level, the deduction is 18,000). Beyond this income, the tax deduction decreases to a minimum of 8,600 krona per year.
Germany	27.2	54.4	41.3	Tax exemption up to income of DM 12,095 for individual and DM 24,190 for couple, plus a DM 3,132 deduction for each child.
Norway	1.5-12.7	1.5-12.7	1.5-12.7	Individuals qualify for a variable deduction of 3,700-31,300 krone per year. 2,540 krone credit for children (up to age 16). 1,820 krone deduction for children (up to age 16). Couples who file separately are given an annual deduction for each spouse's income.
Spain	1.0	2.0	6.1	Credits are given for each dependent under age 30 whose income falls below the ceiling, 22,100 pesos for the first two children, and 31,800 for each additional child.
Italy	0	2.9	3.5	An 807,000 lira deduction for female spouse and 94,437 lira for each child to age 18. For low-income taxpayers, the children's deduction is doubled.
Israel	49.8	64.4	49.8	NIS 1,478 credit for each child; NIS 1,478 credit for husband whose wife does not work outside the home.

Sources:Earnst & Young, 1998; World Bank, World Development Bank-1995; IMF, International Finance Statistics.

Notes to the table:

1.	Couples without children and non-working wife. (In Israel, National Insurance benefit points are not included. If they were included, the threshold tax rate would rise to 91.2 percent of per-capita GDP.)
2.	Couples with two children and working wife. (In Israel, National Insurance benefit points are not included. If they were included, the threshold tax rate would rise to 122.5%.) The tax threshold of a couple with children was calculated for husband only. For the wife, if she has two children, the tax threshold is 71 percent of per-capita GDP. For the United States, the couple is assumed to file its income-tax returns separately.
3.	With respect to Switzerland, Sweden, Spain, and Italy, the data are for 1996. In calculating the tax threshold of a couple with two children, the tax threshold shown is for men only.