Economic debates in Israel tend to focus on the big questions: how much tax should be collected and how much public spending is required, and how the tax burden should be distributed among population segments. Often, however, the problem is not what the state collects, but how. The system in place for collecting mandatory payments on employment income is a clear example of this.
Currently, the same employment income serves as the basis for four separate collection mechanisms: income tax, National Insurance, health insurance, and mandatory pension contributions. Each operates a different system, with different deadlines, different forms, and separate oversight rules. Employers report to one entity, pay another, and clear the payments with additional bodies. Instead of efficient supervision, we have duplication, multiple errors, and a heavy administrative burden – especially for small and medium-sized businesses.
The cost of this situation is high, even if such cost is not always apparent. The state operates parallel collection systems; employers and the self-employed invest their time, money and administrative attention in complex bureaucratic management; institutional bodies maintain huge operational and service systems to handle corrections and mistakes; and employees often find themselves chasing after rights that should have been ensured from the outset – particularly in regards to the continuity of pension rights.
Our policy paper proposes a simple solution: transferring the collection of all mandatory payments based on income from employment to a unified collection system under the Tax Authority. Employers will report and pay only once, with the central system then automatically distributing the requisite amounts to the relevant bodies – the National Insurance, the healthcare system and pension funds. Such a transfer imposes no change in tax rates, social benefits, or pension payment requirements. The change proposed is functional rather than ideological.
The potential savings are far from inconsequential. Estimates point to an economic benefit of billions of shekels annually: reducing collection costs for the government, minimizing administrative burden on employers, and cutting operational costs for institutional bodies. Under reasonable competition conditions, a significant portion of the expected savings will be passed on to the public in the form of higher salaries, lower administrative payments and simpler, more transparent services.
The deficiency in today’s system is particularly pronounced in the area of mandatory pensions. The state mandates pension savings, but places the bulk of the operational burden and responsibility on employers. Every change in employment, every technical error, and every transition between jobs requires individual handling that further has the potential to create legal exposure. There is no reason why every small business in Israel should have to effectively function as a quasi-pension administrator.
It must be underscored that unified collection does not mean centralization of the pension market. Employees should continue to be free to lawfully choose funds, plans and rates as they wish. Competition between institutional bodies would not only be preserved but potentially strengthened due to the interface being singular, simpler, and more transparent.
The question isn’t whether the State of Israel should collect taxes or mandate pension savings, but whether it is doing so wisely. Unified collection is a quiet infrastructure reform that lacks slogans, but can have enormous impact. Sometimes, the best way to help the economy is not through more taxes – but through less bureaucracy.
(First appeared in Hebrew in N12)
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