"Because of the size of the deficit that must be closed, there is no choice but to combine indirect tax hikes and direct tax hikes. It is very important think about where to raise taxes. This is a complex question, because the middle and upper classes already bear a large part of the burden," Bank of Israel research division director Prof. Nathan Sussman told "Globes".
Sussman's remarks are all the more important in view of the Ministry of Finance's plans to raise income taxes by 1-2 percentage points across all tax brackets.
"Globes": Are we already paying higher income taxes in a global comparison?
Sussman: "Israel's direct tax burden is relatively low. One of Israel's characteristics is that the bottom 20% do not pay any income tax at all, whereas in other OECD countries the tax threshold is lower. In this sense, Israelis actually pay little tax, because many do not pay at all, and the poor are below the tax radar."
Top economists say that raising income or companies taxes will harm the economy.
"First, we've already raised the companies tax. It's true that there is an impression that raising taxes hurts growth in the short term, because it reduces disposable income. It is true that it reduces output in the short term, and we take this into account. But it should be understood, and every study proves, that the government deficit harms the growth rate in the long term. Deficits harm growth. It's a matter of a tradeoff between the short and long term. That is why, although it is right to raise the income tax, there's a price to pay in growth, and there is also a price to pay in growth for deficits."
Sussman's remarks support the Ministry of Finance's Budget Department, which wants a permanent and structural tax hike, and counters Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz's position to minimize tax hikes, and rely on hoped for billions of shekels in taxes on companies' trapped profits.
Sussman adds that tax hikes will not be enough to cover the deficit, and that budget cuts are also needed. "To meet the spending target, all kinds of adjustments (budget cuts - A.F.), amounting to billions, are needed for 2013. We're not talking pennies. On the revenues side, if they want to keep a reasonable deficit target, there's no choice but to raise taxes," he says.
Sussman says that the real problem, beyond the deficit, is the debt, and he takes a completely new approach to it. "We mustn’t only look at the debt-to-GDP ratio when comparing countries. You must look at the cost of the debt, not just at the amount. Israel pays a higher interest rate than most countries. Israel's interest payments burden is one percent more of GDP than that of other OECD countries," he says.
"A country that borrowed at a half the interest rate than Israel borrowed at, can, in theory, live with twice Israel's debt. This means that for Israel's debt burden to be like the burdens in other OECD states, we should halve our debt to 35% of GDP." (Israel's current debt is 72.4% of GDP).
"This point is ignored in the public debate," Sussman says. "They want a Maastricht Treaty debt of 60% of GDP. But European countries currently borrow at an interest rate of 1-2%, and we borrow at an interest rate of over 4%; in other words, the cost of debt, even now, is far higher."
How do you explain the difference?
"Most of it is Israel's risk premium, which is due to the geopolitical situation. But a part of it is due to fiscal uncertainty, which has increased in past six months."
Please explain what fiscal uncertainty is.
"We already know that we won't meet the 2012 deficit target. There's uncertainty about 2013. There are two levels: there are unfunded government commitments, and it's not clear how the government will cover them; and on the income level, we already cannot meet the targets, including the deficit target. The result is uncertainty and people are waiting to see what the government will do. In other words, what will happen to the deficit, with spending; there is too much uncertainty, and you always pay a premium for uncertainty."
So long as the current geopolitical conditions persist, not a lot can be done.
"That is why our debt-to-GDP ratio should be less than 60%, because we must lower costs. If you reduce debt, the risk premium goes down, and you get a bonus for credibility, and the market will compensate us. That will offset the geopolitical costs."
Published by Globes [online], Israel business news - www.globes-online.com - on July 4, 2012
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