A pile of smartphones.
(photo credit: INGIMAGE)
Israelis will soon enjoy cheaper shopping, after Finance Minister Moshe Kahlon announced on Monday that he was slashing customs and purchase taxes on a range of consumer products, from apparel to electronics and sports equipment.
Yet most professional economists and the Bank of Israel derided the decision as fiscally irresponsible.
Import duties on a third of the listed items will be canceled immediately, while tariffs on other consumer products will be canceled in a month. While the average Israeli family could now save hundreds of shekels a year, the move will cost the treasury some NIS 800 million.
“We will cancel tariffs and purchase taxes on electrical appliances, televisions, refrigerators, clothing, textiles, cosmetics, video games and toys,” Kahlon said at a Jerusalem press conference on Monday. “We will continue to reduce taxes and tariffs, open the market to competition, lower the cost of living and make it easier for citizens.”
Israeli consumers currently pay taxes of between 10% and 30% on electronics, 12% on home appliances, and 8% on most clothing items.
Kahlon justified the move – which abolishes a quarter of Israel’s industrial tariffs – by pointing to Israel’s unexpected budget surplus. Yet many economists criticized the tax cut as prioritizing politics over fiscal prudence, since the budget surplus resulted from one-time bonanzas.
“I think the finance minister might be mixing up the short-term with the long-term,” said Leon Harris, an Israeli certified public accountant who heads a local consulting and tax firm. “He’s taking advantage of two one-off windfalls which are not permanent, which shouldn’t lead to a permanent tax cut. And if the tax cut is not permanent, he should say so.”
When Intel bought Israeli start-up Mobileye in March for $15.3 billion, the sale was taxed, bringing billions of shekels in tax proceeds.
Another boost to the coffers is that the Israeli government temporarily allowed companies to pay a preferential dividend at a lower rate. Until September, major shareholders (holding 10% or more of a company’s stock) could pay 25% taxes on their dividends instead of up to 33%, persuading people to declare and pay tax on dividends sooner than they would have otherwise.
But it’s likely that Israel won’t enjoy another multi-billion-dollar deal similar to Mobileye’s on an annual basis. And the preferential dividend tax rate has cut into otherwise future tax revenue.
Still, for lowering the prices of Israel’s inordinately expensive consumer products – as ranked by the OECD – the tax cut is a step in the right direction.
“It’s a smart decision because the prices in Israel are quite high and it’s good to increase competition from imports,” said Alex Zabezhinsky, chief economist at Meitav Dash investment house.
“But there is no reason to permanently decrease taxes for the people. It’s something you need to raise from some place, for next year, in a few years… [eventually], we’ll have a deficit and the government will need to cut expenses,” he said.
It is also possible that Kahlon waited until Prime Minister Benjamin Netanyahu was abroad to make the announcement.
“The tax cut comes from competition between Netanyahu and Kahlon and maybe he’s using this tax decrease [for his own purposes],” said another economist on condition of anonymity. “You know, Kahlon constantly promotes himself and talks about the tax burden on the family. And [this is] one of the steps of this... promotional and political campaign.”
Aside from removing tariffs, Kahlon on Monday also touted the government’s track record of reducing the value-added tax from 18 to 17 percent in 2015, along with granting more tax deductions for young couples. Other expensive budget items in the works include the government’s plan to raise monthly disability and pension payments.nts.