Minister of Finance Yuval Steinitz will cut the value added tax (VAT) to 16%, from its current level of 16.5%, as of Friday, January 1st.
Earlier in the year, the Ministry of Finance raised the VAT rate from 15.5% to 16.5% as part of a slew of tax hikes.
The Ministry of Finance said, "This cut will help raise the economy's growth, it will help, together will higher allocations in 2010, to raise the purchasing power of the weaker classes, and will contribute, together with the higher interest rate, to lowering inflationary pressures."
Investment house IBI chief economist Ayelet Nir said, "It would have been better to cut a full percent in the middle of the year, instead of by a half a percentage point in the beginning of the year. Because of the cost of updating the price on shelves, and other reasons, a small cut almost does not reach consumers at all."
The Knesset approved the cut today. 49 MKs voted for the proposal, with no votes against it.
Steinitz told the Knesset, "We raised the VAT by a percentage point in the summer, and said we will bring it back down at the beginning of 2011. We decided to push it up and cut half the increase now, for three reasons. First, it will give extra support to the growth we see in the economy; second, and more importantly, together with the expected growth in 2010 of child and elderly allocations, the cut will raise the purchasing power of the weaker classes and reduce gaps." Steinitz added that the third reason was that it will reduce inflationary pressures.
The higher VAT and other indirect taxes contributed to growing inflation, which reached 3.8% over the past year. Without those tax hikes, inflation would only have been 2.6%. The Bank of Israel has been raising interest rates over the past several months to battle growing inflation expectations.
Published by Globes [online], Israel business news - www.globes-online.com - on December 30, 2009
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