Israel backtracks on tax hike to secure austerity package approval

By Steven Scheer

JERUSALEM (Reuters) - Israel's parliament gave final approval to a package of unpopular tax hikes aimed at reining in the budget deficit on Monday after Prime Minister Benjamin Netanyahu backtracked on a planned income tax hike for middle-income earners.

To ensure support for the austerity package, Netanyahu on Monday scaled back a planned 1 percentage point income tax increase on those earning more than the average salary of 8,881 shekels ($2,231) a month from 2013, saying the increase would now not apply to those earning less than 14,000 shekels a month.

The tax hike had been widely criticized in the Israeli media for unduly harming the middle class.

"We prevented harm to the middle class," said Moshe Gafni, chairman of parliament's finance committee, who brokered the deal.

During a special summer session of parliament, or the Knesset, lawmakers approved a series of steps in their third and final readings. Earlier in the day, the plenum had given its initial nod followed by approval by the Knesset's finance committee.

"We approved steps that will prevent a huge deficit with the aim of safeguarding the Israeli economy and jobs for the citizens of Israel. These are responsible steps to protect the Israeli economy from the world economic crisis," Netanyahu said after the vote.

Income tax on salaries above 67,000 a month, or 800,000 shekels a year, will rise by 2 percentage points from 2013. Value-added tax (VAT) is set to rise to 17 percent from 16 percent on September 1, 2012.

Last week, the cabinet trimmed most ministries' budgets by 5 percent and the tax authority is targeting tax evaders to collect billions of shekels. Two weeks ago, Steinitz ordered immediate tax increases on cigarettes and beer.