Under the guidance of Professor Yoram Margalioth, the Institute has conducted a study on tax policy from the perspective of household economies, which suggests an alternative to the existing tax system.
The document presents one of the shortcomings of the Israeli tax system in the way the family unit is taxed, which adversely affects the haredi sector where the number of children per household is relatively higher and the woman is the main breadwinner.
Income tax should be calculated according to taxpayers’ economic ability, meaning, according to their ability to consume goods and services. Consumption takes place at the household level, which generally means the family unit. Generally the couple shares their income, and naturally they include their children. Thus, the basic taxpaying unit of analysis should be the family, not the individual.
But instead the Israeli tax system is preoccupied with the question of whether to calculate the couples’ income as joint income (which is the rule) or as separate (the exception to the rule – which is so common that, in effect, it constitutes the rule), and changes legislation in this regard every several years. In addition, the number of children in the family reduces the tax liability indirectly by providing tax credits whose amount is determined arbitrarily, instead of doing so directly and accurately as will be suggested below.
The proper way to tax the family unit is to consolidate all incomes and distribute it across the number persons in the household. Thus, for example, let’s compare two families who both have a taxable income of 20,000 NIS per month. One family has two parents and three children, and the other has two parents and six children. The per capita consumption capacity of the first family is higher than the per capita consumption capacity of the second, and therefore it should pay higher taxes.
If we calculate the tax by dividing the household income by the number of persons consuming it, the tax imposed will reflect the fact that the per capita income in the first family is 4,000 NIS, while in the second family it is 2,500 NIS.
To be precise, we should take into account economies of scale enjoyed by members living in a joint household. Some household expenses are fixed costs for all members of the household, while some expenses are variable. The National Insurance Institute calculates these economies of scale in calculating the poverty line, using equivalence scales to convert the number of household members to standard persons. The same should be done when calculating taxable income.
These proposed changes in the tax system will promote equality between households, prevent discrimination against households with a larger number of children, and will enable calculating tax according to household incomes irrespective of which spouse is the one earning it.
This is an example of a suggested amendment that will fix the tax distortion of haredi households in a way that is consistent with basic principles of public economy and works to the benefit of the entire population.
A policy document based on this study is presently being written, and an article detailing the research project and its findings is due to be published in a leading Israeli academic journal.