Tax Reduction Plan for the Benefit of Low Income Populations

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					     Ministry of Finance



Tax Reduction Plan for the
  Benefit of Low Income
       Populations



                             1
           Principles of the Economic Policy



   Slashing expenditures
   Tax reductions




                                               2
                   In addition to …




   Encouraging growth
   Strengthening low-income populations




                                           3
Tax Reduction Plan for the Benefit of Low-Income
                  Populations

                  The Problem:

    Low-income populations do not benefit from
     the reduction in income tax rates
•    Their low income is not subject to tax
    Basic goods constitute a high proportion of the
     consumption basket of Low-Income
     populations
•    As opposed to stronger populations, for which
     this is a marginal expense


                                                   4
               The Problem-cont’:




   Indirect taxes paid by low-income populations
    rate among the highest in the world
•   VAT, purchase tax, customs on basic
    consumer goods




                                                    5
Indirect Tax Burden in Israel
  and Selected Countries
 19

 17

 15

 13

 11

 9

 7
 5
      Israel   European   Canada   Australia   United
                Union                          States

                                                        6
Tax Reduction Plan for the Benefit of Low-Income
                 Populations
                  The Solution:




    Reducing indirect taxes on a series of basic
     goods
    Reducing purchase tax
•    At rates between 5-30%
    Reducing customs
•    At rates between 5-12%
    Reducing VAT
•    To a level of 17%
                                                    7
     Reductions Are Relatively Beneficial to Low-
                   Income Sectors
           Value of benefit as % of net income
4%
                    Bottom decile receives
                  benefits amounting to
3%               nearly 4% of its income         Reduction of
                 Top decile receives less than   customs and
                                                 purchase tax
                            1%

2%

                                                 Reduction of
                                                         VAT
1%


                                                        8
0%                       Deciles
             Value of Tax Reduction per Family

                      (in NIS per year)
        Decile        Net monthly income   Annual value of benefit



First                       2,272                  1,007



Fifth                       6,967                  1,244



Tenth                       20,936                 1,958



                                                                 9
  Tax Reduction Plan for the Benefit of Low-
            Income Populations

            Two types of tax reductions


 On durable goods
 On basic consumer goods




                                               10
     Ownership Percentages of Durable Goods
       Durable goods have become an integral part of
           consumption by low-income sectors
Product                    Percentage of    Percentage of
                           ownership in top ownership in top
                           decile           decile
Refrigerator               99.6%             100%

Washing machine            89%               95%

Television                 84%               99%

Stove                      75%               85%

VCR                        38%               87%

                                                               11

Source: Central Bureau of Statistics
   Tax Reduction on Durable Goods
  Percentage of reduction in consumer price
Product          % of reduction


Refrigerator     15-18


Stove            14-16

Washing machine 14-17



Television       20-24


VCR              18-22                        12
             Tax Reduction on Durable Goods
                             Selected goods

Product                   Consumer price      Tax reduction in
                                              NIS
Refrigerator              6,000               900

Stove                     3,000               400

Washing machine           2,800               350

Television                2,500               500

VCR                       700                 150

                                                                 13

Source: Central Bureau of Statistics
             Relative Consumption of Goods
        In bottom decile in comparison with top decile
10                                      9.2        9.2
 9
 8
 7
 6
 5                           4.6
 4               3.63

 3    2.6
 2
 1
 0
     Pasta      Sugar &    Margarine   Rice        Eggs
                 related                                  14
                products
Canceling Customs on Basic Consumer Goods
Main components of consumption basket in lower deciles
Product           Existing customs   New customs
                  duty               duty
Rice              5%                 0%

Pasta             12%                0%

Margarine         3%                 0%

Coffee            3%                 0%

Sugar (cubes)     6.8%               0%

Eggs (within quota 100%              0%
restriction)                                         15

Sesame            5%                 0%
    Tax Reduction Plan for the Benefit of Low-
              Income Populations
                    Cost of the plan



   In annual terms – NIS 2.6 billion
   In 2004 (approximately ten months) – NIS 2.1
    billion




                                                   16
    Tax Reduction Plan for the Benefit of Low-
              Income Populations
                       Summary



   Lowers prices of basic goods
   Benefits Low-income sectors
   Encourages demand




                                                 17
FIN


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