A further tax cut is at the top of Minister of Finance Moshe Kahlon's agenda this morning. Over the next few days discussions will take place at the Ministry of Finance at which officials will present their recommendations. Kahlon will then decide whether to cut taxes, and if so, which ones, and by how much. The decision will be made in consultation with Prime Minister Benjamin Netanyahu and the National Economic Council headed by Prof. Avi Simhon.
Kahlon has declared in the past that the economic datum that will tip the scales one way or the other will be state tax revenues in the first quarter of the year, a figure due to be released within the next week. According to estimates reported a week ago, first quarter tax revenues met Ministry of Finance forecasts, and were not exceptionally high. The assumption is that if that is the case Kahlon will still decide to cut taxes, as he has in the past.
With Netanyahu's blessing, Kahlon has introduced tax cuts that have reduced state revenues by more than NIS 10 billion annually, according to Ministry of Finance figures. VAT was cut from 18% to 17% in 2015 (NIS 5 billion); Companies Tax has been gradually lowered from 26.5% to 23% since 2015, while the rate for exporting companies in the periphery has fallen from 9% to 7.5% (over NIS 4 billion cumulatively); Income Tax brackets were widened in 2017 (NIS 1.5 billion); and customs duties and purchase taxes were reduced in 2017 (NIS 1.5 billion). To this should be added higher tax credit points and negative Income Tax payments, which will cost the state over NIS 2 billion annually.
Kahlon, however, disputes the figures. He believes that his tax cuts have actually resulted in an increase in state revenues. Kahlon and Netanyahu side with the economic theory according to which tax cuts mean higher tax revenues because they boost economic activity and growth. This theory rests on the model known to economists as the Laffer curve, only in the view of most economists the link between tax cuts and rising revenue grows weaker the more taxes are reduced. This means that the first tax cuts that Netanyahu and Kahlon carried out in September 2015 in Companies Tax and VAT will necessarily have a stronger effect that any tax cuts made now.
Outside of the Ministry of Finance and the National Economic Council it will be hard to find economists who support a further tax cut. The Bank of Israel can be expected to adhere to its opposition to such cuts, voiced by Governor of the Bank of Israel Karnit Flug at the cabinet meeting to approve the budget in January. Flug and the OECD, which (like Kahlon) favor expanded government expenditure, believe that the government needs to increase its tax revenue, but not that further tax cuts will achieve this. The OECD says that revenues can be increased without raising taxes, through abolition of unjustified tax benefits and through greater technological efficiency at the Israel Tax Authority.
Published by Globes [online], Israel business news - www.globes-online.com - on April 8, 2018
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