Israelis have good reason to celebrate this month:

Tax Freedom Day (TFD) falls on June 22, 25 days earlier than in 2009

It's the first time since 1990 that Israel can enjoy such an early TFD.

TFD marks the day when on average Israelis stop working for the government, and start earning money for private consumption (or savings).

This year Israelis will be able to celebrate Tax Freedom Day (TFD) on June 22, 25 days earlier than in 2009. For the first time since TFD was retroactively calculated in 1990, Israelis will work less to finance government expenditures than their private activities. In 2010, Israelis will work 175 days for the government and 190 days for themselves.

TFD is calculated by taking the ratio of total taxes paid by the Israeli population over Israel's Net National Income (NNI), according to data published by the Central Bureau of Statistics (CBS) and the Ministry of Finance. Total taxes include not just income tax, but VAT, local taxes, import taxes, car and fuel taxes, taxes on corporations and much more.

Since Tax Freedom Day is a ratio of taxes to NNI, TFD moves backwards when tax collection grows slower than the growth of the economy. In 2010, Israel's NNI is expected to increase by 2.5%.

In 2010, taxes were reduced, the income tax rate dropped by 1%, with the top marginal rate now at 45% instead of 46% in 2009. Corporate income tax also decreased by 1% and stands now at 25% instead of 26% in 2009. Finally, the VAT rate was fixed at 16% in 2010 compared to 16.5% in 2009.

The Jerusalem Institute for Market Studies (JIMS) has calculated Israel TFD every year since 2004. JIMS also retrospectively calculated Israel TFD going back to 1990. It was found that in all 19 years from 1990 to 2009, Israeli taxpayers worked more for the government than for themselves. This year, Israelis can finally enjoy working more for themselves than for the government.

Although an early TFD is cause for celebration, one shouldn't forget that Israel's tax burden is still high compared to other developed economies. For example, in 2010, the US celebrated TFD on April 9th, Cananda on May 2nd and the UK on May 30th. Among the countries celebrating TFD in June are Belgium (June 8th), the Czech Republic (June 11th) and Croatia (June 13th). Israelis will work less for their government than the Germans (July 8th), the French (July 16th) and the Swedes and Norwegians (July 29th).

In 2010, we will work a total of 175 days just to pay our taxes. To put this in perspective, think about our other household expenditures and how many days we work to cover those. For example, we work 29 days for our food, 55 days to pay for housing costs, and 34 days for transportation and communications.

Which Taxes Are Largest?

TFD is an average for all Israelis. For some individuals, their personal TFD could be earlier (if they pay less taxes than the average) or later (if they pay more taxes than the average). TFD makes it simple for taxpayers to realize just how much of their money is transferred to the government each year. It is usually quite confusing and daunting for taxpayers to gauge their tax burden. The visible part of taxes taken in the form of income tax can be easily calculated by anyone. However, hidden taxes and fees like customs tax and purchase tax are often overlooked. In fact, individual income taxes represent only 42 days work, sales taxes take another 36 days, work and national insurance contributions account for 29 days of work. Unfortunately, we also have to work 22 days for import taxes, 15 for corporate taxes, 13 days for local taxes, 10 days for health taxes and 8 days for fuel taxes.

Why do Israelis have to work so many days to finance government coffers? Israeli government spending is set to reach 325 billion NIS in 2010, which is 43,233 NIS for each individual living in Israel. For a family of four, government spending is more than 172,900 shekels a year.

It is certainly not clear that Israelis receive public services worth this amount of money; in fact 34% of the total public budget is earmarked to repay the interest and principal on loans that the government took out in the past. This has little current consumption value to Israelis.

In order to cover past governments' overdraft, Israelis have to work 63 days a year. This is a reminder that when governments take out loans to finance their expenditures, the dubious short-term benefits of such an action usually lead to a substantial increase in the tax burden on future generations.

Interestingly, Israelis work much less to cover the education bill (only 20 days), welfare and social services (24 days) and health expenditures (10 days). Although Israel's high tax burden is often attributed to the security situation, Israelis only worked 26 days in 2010 to finance the defense budget.