As part of the planned income tax cuts that Israel's Ministry of Finance is considering implementing, due to surplus revenues, are creative measures such as enlarging credit points, and job grants (negative income tax). Sources among decision makers in Jerusalem say that the main considerations guiding Minister of Finance Moshe Kahlon in choosing which taxes to cut are political and electoral rather than macroeconomics.
Speaking earlier this week at the Kulanu party conference, Kahlon said, "There will be tax cuts in the coming few days. We will give major amounts to disabled people and benefits to the young, to working mothers and to soldiers."
Kahlon is expected to announce his tax cut plans on the eve of the Passover holiday at the start of next week. However, the full details of the plan won't be revealed until after the holiday due to lack of time. Critical tax revenues data for March has yet to be published, which will enable Ministry of Finance chief economist Yoel Naveh to calculate an updated revenue forecast based on first quarter figures. Without Naveh's forecast, there is no way of knowing the amount of the expected surplus that Kahlon wants to give back to the public through tax cuts and other measures.
At present, Kahlon and his staff are remaining tightlipped and refusing to talk. Ministry of Finance director general Shai Babad, Kahlon's right-hand man are even refusing to give the Budget Division any information. Isolating the Budget Division from decision making has also been seen during the negotiations over the Israel Broadcasting Corporation. This phenomenon of keeping the Budget Division at arm's length was also when Yair Lapid was finance minister.
The Prime Minister's Office also doesn't know the details of the planned tax cuts. However, PMO director general Eli Groner wants to ascertain that any additional expenditure does not exceed a budgetary expenditure ceiling and is not taken from money not ensured from budgetary sources.
Speaking at the National Energy Conference yesterday, Minister of Economy and Industry Eli Cohen pointed out that the government had already reduced the tax burden by 15%, which meant relinquishing revenues of NIS 11 billion. This includes reducing corporation tax from 26.5% to 23%, reducing VAT from 18% to 17% and lowering tax brackets for those earning monthly salaries of up to NIS 16,000. In addition, manufacturers in the periphery have had export taxes reduced from 9% to 7.5%, and corporation taxes have been lowered for high-tech companies to 12% (6% for companies with annual turnover of $10 billion) and even 4% for drawing dividends.
With elections looming, Kahlon is eager to introduce tax cuts that will benefit his voters. The long-term benefits of the economy can wait. This makes the likelihood of more tax cuts that will benefit companies very slim. Corporation tax is already relatively low and reducing taxes on capital market returns is not part of Kahlon's political philosophy. A more likely measure is a 0.5% cut in VAT, which Kahlon has in the past called "the most unjust tax." The problem is that such a 0.5% cut would shave more than NIS 4.5 billion off state revenues (according to Ministry of Finance projections) and after the 1% VAT cut in October 2015, there was a feeling among the public that the tax cut remained in the coffers of businesses and did not reach the pockets of tax-paying working people.
This leaves one major tax - income tax. Kahlon seriously considered a major change in income tax brackets last summer but in the end made do with changes for salary earners up to NIS 20,000 per month as part of the 2017-2018 budget. So for example, the basic 10% monthly income tax threshold rose from NIS 5,221 to NIS 6,220. The NIS 1 billion that this cost in revenues was partly offset by raising taxes for those earning above NIS 53,000 per month.
However, head of the National Economic Council and Prime Minister Benjamin Netanyahu's senior economic advisor Prof. Avi Simhon recent recommended a more drastic step to Kahlon and Netanyahu. He feels that the lower socioeconomic groups have already benefitted from the rise in the minimum wage while the middle classes have barely benefitted from the revenues surplus. Therefore, Simhon proposes lowering the appropriate tax thresholds.
The main opponent of these measures is the Bank of Israel. Governor of the Bank of Israel Dr. Karnit Flug told "Globes last week, " "We obviously do not want to cut taxes permanently because of higher tax revenues resulting from one-time events, such as the Mobileye acquisitions and auto imports. In terms of business turnover we are placed in a position where we should be looking to exploit long-term growth potential so that even with permanent surpluses, it is preferable to invest in infrastructures and education. Taxes are already relatively low."
Published by Globes [online], Israel business news - www.globes-online.com - on April 5, 2017
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