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what kind of lifestyle does our tax system encourage?

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legal warning

legal warning: The information here should not be understood legally as financial advice. If you believe anything on this site is in error, please contact me. I am always open to corrections, new ideas, and new opinions...

A tax is not only a way to collect money; it is also a way to encourage a lifestyle. For example, a cigarette tax is not given to compensate people who suffer the effects of smoking involuntarily; it is used to discourage smoking. A gas tax not only collects money for energy use, but is also used to encourage alternative forms of transportation. So it should be no shock if I tell you that a system of income tax can be used not only to collect tax on income, but to encourage a particular lifestyle as well. The following post will analyze the lifestyle encouraged by our tax system and what that means for Israelis.

As a rule, the Israeli tax system encourages both partners in a marriage to work. Let me bring two examples:

In the case of a married couple, a woman should try to earn at least ₪4793 and the man ₪4000, so as to maximize the benefit from not paying taxes. If the man made all this money alone, then the household would clear ₪901 less income (₪7581 instead of ₪8482). Or to put this into another perspective, in order for a man to clear the amount that both partners would clear in the above case, he would have to have a salary of ₪10,150, ₪1,357 above the combined total for a couple mentioned at the beginning of this paragraph. What this means is that the Israeli tax system not only rewards both partners for working; it makes it harder for a single supporter to clear income.

Generally speaking, the tax system is structured so that couples benefit the most when one partner is no further than one tax bracket away from his partner. After that point, the marginal rate of taxes will rise more than the amount saved by the lower earner. Okay, now in English. If I move into a higher tax bracket and take on more hours as my partner works less, I will pay more. For example, let’s say my wife and I are making ₪11,000 (gross profit) a piece. Now as we have kids I decide to take on more work and have her do less, so I work to make ₪17,000 and she makes ₪5,000 – I would loose an additional ₪586 due to taxes. And if we were to divide the burden even more, say, ₪19,000 and ₪3,000 – I would make ₪1,360 less!

So it seems clear that the Israeli tax system wants both partners working; staying at home with the kids is punished. Now, I am completely in favor of both men and women working with equal rights and opportunities, but playing reward and punishment in order to push a certain lifestyle is wrong; Israeli women should have the right to choose to work or spend time with the kids (men too for that matter.) The sad truth is that Israel’s tax system reflects a kibbutz mentality where the parents are not available to raise their kids and state sponsored socialized education is used as the moral compass.

The good news is that this problem could be easily remedied. Were Israel to adopt a tax system whereby the marginal rate was determined by joint income (the amount the husband and wife make together – no matter how much each one makes individually), then Israel would indeed reward family life and allow the couple to choose if having both partners working or having one partner spend time at home is better for the family.

So, how can we turn this situation practical? First, maximize the ability for both partners to work, certainly when you need the money. Second, do not give in to the pressure of the tax system; if one parent wants to only work half a job or stay at home with a child, they should do so; only appreciate even more the sacrifice you are making for your child and how important it is. Finally, spread this article and bring this to the attention of anyone you can, especially those in the government. This country has come a long way and hopefully, as we continue to thrive, the decision to divide work and family life will be left with the only people who can make such a decision, the individual citizens.

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