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Tax on Israeli labor among the lowest in OECD

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Itongadol.- Taxes imposed on Israeli labor are among the lowest in the OECD, according to data the organization released this week.

Looking at Israel’s tax wedge – which measures what chunk of an employer’s labor costs end up going to the government in some form instead of to the workers – the data showed that only three countries (Mexico, New Zealand and Chile) had lower percentages than Israel.

“The average worker in Israel faced a tax burden on labor income (tax wedge) of 20.7% in 2013 compared with the OECD average of 35.9%,” the report noted. The United States also fell at the lower end, with a 31.3% tax wedge, while Belgium (55.8%), Germany (49.3%) and Austria (49.1%) topped the list.

The tax wedge adds up things like income taxes and social security contributions or payroll taxes paid by both employer and employee.

Higher tax wedges mean higher costs for businesses trying to hire workers, and lower take-home pay at the end of the day for those workers. On the other hand, they also mean more tax money for the government, which can make its way back to workers in government programs and retirement savings.

The data showed that over time, Israel’s government has taken a smaller bite out of take-home pay. The tax burden for the average single worker dropped 8.9 percentage points from 2000 to 2013 (from 29.6% to 20.7%). In the OECD as a whole, the percentage dropped just .8 percentage points in the same period.

Similarly, one-income couples with two children in Israel saw an 8.1-percentage-point drop in their tax wedge in the same time frame (from 25.5% to 17.4%), while the corresponding OECD figured dropped 1.3 percentage points, from 27.7% to 26.4%.

Yet when it came to family benefits for poor workers, Israel fell somewhat behind.

A one-income couple with two children and earning half the average salary in Israel got 6.6% of their income back from benefits and another 3.6% back from negative income tax, for a combined 10.2% benefit.

In the OECD at large, however, family benefits were more generous, returning 14.6% for family benefits and another 1.4% in negative income tax, for a total of 16%.

That said, the other taxes throughout the OECD were higher, meaning the bottom- line tax wedge was still lower in Israel.

When the tax benefits for the same couple were combined with the total 7% of wages paid by employer and employee for social security (national insurance in Israel), poor working parents got a 3.2% boost over what employers paid them from the government.

In the rest of the OECD, the 16% benefit only put a dent in the overall 23.1% the government took, leaving poor working parents getting 7.1% less than their employers paid.

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