Sources inform ''Globes'' that, on Sunday, Prime Minister Benjamin Netanyahu asked Ministry of Finance officials to examine not raising the companies tax rate by 1.5 percentage points on January 1, 2014, in a move that would cost NIS 900 million in lost tax revenues. Netanyahu raised the idea at the previous cabinet meeting.
The request was made after Minister of Finance Yair Lapid decided not to raise the individual income tax rate by 1.5 percentage points on January 1, a decision that was made without Netanyahu's knowledge.
Lapid and Ministry of Finance officials declined to say no to Netanyahu's proposal, only saying that, during 2014, the ministry would reassess whether the tax cut was possible in terms of meeting fiscal targets. They added that, in any case, the tax cut, if carried out, would only come into effect in 2015, and not part of the 2014 budget.
Netanyahu's request is more justified economically, because growth figures indicate that private consumption is continuing to increase, including consumption of durable goods, which indicate that Israelis strongly want to consume and spend money. On the other hand, investment in the economy has slumped, and Israeli companies are leaving the country because of costs, especially because of the challenges posed by the strong shekel, which is harming the competitiveness of exports. Furthermore, the employers' tax is a disincentive for hiring.
Tax the middle class instead of companies
Lapid aides say that to finance the cancellation of the companies tax hike, the Prime Minister's Office is proposing taxing study funds, a regressive tax break that benefits the top 20% of income-earners. They say that Lapid has rejected this idea, as he calls study funds "the middle class's petty cash".
The OECD 2013 Economic Survey on Israel explicitly calls for taxing study funds.
A top official in Lapid's bureau said, "We favor tax cuts. But that is easy to say. We have to see what will happen in 2014. They (the Prime Minister's Office - A.F.) know our position perfectly well, because the Ministry of Finance discussed this matter."
The sources added that Prime Minister's Office director general Harel Locker, the office's strongman, who is responsible for handling Netanyahu's economic matters, is behind the proposal. Since Lapid's decision to cancel the income tax hike, Locker believes that the budget surpluses should be used to invest in the employers' tax and companies tax, in order to stimulate economic activity and to cancel "job destroying" taxes, as he puts it. In an interview with "Globes TV", Locker at the "Globes" 2013 Israel Business Conference, said that he welcomed the individual income tax cut, but admitted that he expected a similar move for businesses.
Meanwhile, the Ministry of Finance has to deal with new estimates by the Bank of Israel, which says that the government must either cut spending or raise taxes by NIS 10 billion in 2015 to meet fiscal targets. Sources say that the ministry strongly opposes again raising the income tax, and prefers government spending cuts by changing the current spending rule. This rule is very expansive for two reasons: the reliance on growth over the past ten years, when growth was high before the global economic crisis; and the plunge in the debt-to-GDP ratio to 68%, very close to the 60% target set a decade ago.
Published by Globes [online], Israel business news - www.globes-online.com - on December 9, 2013
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