"The government must take additional measures to help reduce the deficit and the debt in order to keep the credit rating high and interest costs low, and to keep financial soundness with no potential shocks. It will therefore be proper to raise VAT again. This is simple to do and effective," BDO Ziv Haft managing partner Shahar Ziv told "Globes" yesterday at the firm's Kibbutz Industries Managers Conference, which discussed the effects of a VAT hike on consumption and inequality.
Ziv added, "At the same time, to prevent harm to the poor, the earned income tax credit should be limited to low income-earners to compensate for the VAT hike, and to encourage joining the workforce. The cost of this compensation is at least NIS 750 million."
Ziv presented BDO's analysis, saying that Israel's current VAT rate of 17% is among the ten lowest rates among the 34 members of the OECD. The median VAT in the OECD is 20%.
The analysis found that raising VAT by one percentage point boosts the monthly expenditure by the bottom 10% by NIS 46.60 (NIS 559 a year), and boosts the monthly expenditure by the middle 10% by NIS 69.20 (NIS 830 a year).
The monthly cost was multiplied by the number of households in each 10% (220,410), resulting in the cumulative cost of NIS 747 million, the amount that Ziv wants to allot to the earned income tax credit for these deciles.
Ziv concludes that raising VAT by one percentage point would generate NIS 3.55 billion in annual revenues (the Israel Tax Authority estimates the revenues at NIS 4 billion), in exchange for which NIS 750 million can be used to compensate the poor. The net tax revenues would therefore be NIS 2.8-3.25 billion.
This raises the question whether the earned income tax credit is the best mechanism for compensation, since not every eligible person can use it. Prof. Michel Strawczynski, who chaired the research team which assists the plan, revealed that, as of the end of 2012, data indicate a fulfillment rate of 53%. "On one hand, the fulfillment rate is relatively low compared with similar programs in other countries. In the US, it began with 30-35%, but it's clear that 53% is not enough, and the fulfillment rate should be increased."
Strawczynski, a former Bank of Israel top official who is now at the Hebrew University of Jerusalem, believes that to increase the fulfillment rate, it is necessary to increase the per capita grant. "This will cause fence-sitters to come off the fence and join the program," he said.
According to the latest figures, the Ministry of Finance budgets NIS 1 billion for the earned income tax credit, of which NIS 500 million is actually used.
Published by Globes [online], Israel business news - www.globes-online.com - on January 10, 2013
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