The Israeli government has decided to cut direct taxes - income and company taxes -and simultaneously raise indirect taxes. While in theory, one measure cancels out the other, that is not the case in practice.
Half of income earners do not even reach the income tax threshold, and the beneficiaries of the income tax cut in 2011 will only be people with a gross monthly salary of over NIS 8,470 - and they will get just NIS 32 a month. When the indirect tax hikes are taken into account, they lose.
Meanwhile, the government is raising electricity and water tariffs to reflect their so-called "real costs". Water tariffs have risen 33% in just two years. arnona (local property tax) will automatically go up by 1.4% in January, and many local authorities have received permission to raise it even higher, by as much as 7% more. The mayors claim that has eroded their budgets for years, which is easier than increasing public spending.
Prime Minister Benjamin Netanyahu's position that tax cuts generate economic growth has no support either in Israel or in the world. In its latest report, Bank of Israel, Governor Stanley Fischer said, "Tax cuts should be reduced."
The IMF and the OECD both warn that tax cuts without debt reduction will raise Israel's risk premium, which will raise the financing costs of Israeli companies, or force cuts in public spending.
"Israel's tax policies, as stated in the state budget, raise a riveting riddle in political science," Dr. Momi Dahan of the Hebrew University of Jerusalem and member of the Israel Democracy Institute told "Globes". "Why does the public allow the government to cut income taxes, thereby increasing the wealth of the richest, while simultaneously raising indirect taxes, which disproportionately hurt purchasing power of the poor? It's hard to find other countries that have applied tax measures that widen income gaps precisely at a time when these gaps have deepened. The result is that Israel is now among the countries with the greatest inequality."
Dahan added, "This policy has been instituted against the advice of the Ministry of Finance's professional echelon. It reflects the world view of Netanyahu. The Ministry of Finance justifiably opposes it, because income taxes in Israel are already among the lowest among developed countries, while its indirect taxes are among the highest."
Former Ministry of Finance director general Avi Ben-Bassat, one of Israel's top macroeconomists, also lambasts Netanyahu. "The prime minister zigzagged more than once, but insists on reducing the marginal tax burden. But he does harm, even to his method," he told "Globes".
"When it was realized that this was causing a deficit, they raised the cap on National Insurance payments, which effectively raised the marginal tax rate. Instead of cutting the income tax on one hand and raising National Insurance on the other, it would have been better to freeze the income tax cut for individuals and companies. The second mistake was to raise VAT, which is a regressive tax, because the harm to the poor is greater than the income tax."
While the government does not dare raise direct and progressive taxes, Deputy Minister of Finance Yakov Litzman recently proposed raising the health tax by 0.5% to pay for additional healthcare services.
While gasoline prices are rising worldwide, the high price of gasoline in Israel is mainly due to its astronomical excise of NIS 0.56 per liter. It does not bother the Ministry of Finance to repeatedly raise the excise on fuel, even as Shai Agassi has not yet brought us salvation with his electric cars, the last time we checked.
The Bank of Israel is fighting the real estate bubble, which only hurts young couples in the short term, while the mobile carriers are raising their rates to show the regulator who is really the boss.
No one is even talking about a cost-of-living increment for the private sector. While the old mechanism is obsolete and only suits very high inflation levels, the Histadrut (General Federation of Labor in Israel) has no interest in changing the mechanism in its alliance with the Manufacturers Association of Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on December 27, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010