Adv. Doron Levy Highlights Concerns Regarding Decrease in Tax Incomes and Impact on the Israeli Economy
Tax Expert Calls for Urgent Analysis and Action as Decrease in Tax Incomes Raises Concerns
By: Adv. Doron Levy
According to the report, the state's tax incomes for January-February 2023 amounted to NIS 78.8 billion, representing a decrease from NIS 82.6 billion during the same period last year. Notably, direct taxes, including income tax from self-employed individuals and companies, saw a significant decline of 12%. Incomes from withholdings, such as income tax withheld from salaried employees and capital market withholdings, experienced a 5% decrease in real terms.
Adv. Doron Levy emphasizes, "The downward trend in tax income spans across various income categories, indicating a decrease in the overall economic activity within the country. This decline appears to be influenced by rising interest rates, the global high-tech slowdown, and the repercussions of attempted regime upheavals."
The rise in inflation, coupled with increasing interest rates, has created a burden for mortgage payers and caused a significant slowdown in the real estate sector. This sector has traditionally been a major contributor to tax revenues. Consequently, the reduced purchasing power of the middle class and the economic slowdown have resulted in decreased tax incomes for the state.
Adv. Doron Levy explains, "The Bank of Israel's decision to raise interest rates aligns with global practices to fight inflation and induce an economic slowdown. However, the subsequent price increases have led to a decline in mortgage applications, a slowdown in the real estate sector, and lower prices. As a direct consequence, real estate tax income for the state has sharply reduced."
The lawyer further points out that high inflation negatively impacts tax collection in Israel. The transition from an inflation-adjusted tax system to a predominantly nominal system has contributed to a cumulative erosion in tax collection since 2008. Shareholders and businesses are now motivated to finance operations through shareholder loans, taking advantage of tax exemptions and effectively reducing taxable profits.
Adv. Doron Levy raises concerns about the long-term effects, stating, "The erosion of the tax base due to rising inflation and high real interest rates poses challenges for the Israeli tax system. It is essential to address these issues to ensure a sustainable and robust revenue framework for the state."
As the consequences of these ongoing processes continue to unfold, Adv. Doron Levy warns that they may further impact the state's tax incomes, potentially impacting the Treasury's income forecasts for the remainder of the year. He urges policymakers and stakeholders to carefully consider the implications and take proactive measures to stabilize the tax system and foster economic growth.
About Adv. Doron Levy:
Adv. Doron Levy is a highly respected tax attorney known for his tax law and strategic counsel expertise. With a comprehensive understanding of the Israeli tax system, he advises both domestic and international clients on various taxation matters. Adv. Doron Levy is a senior partner and heads Amit, Pollak, Matalon & Co's Tax and Class Action practices.