Fundamentally Freund: Tax and spend, Israel-style
It isn’t enough that the taxman takes from you when you earn money, he also wants a larger piece of what you have left.
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Just when Israel’s economic situation is facing some increasingly difficult
challenges, along comes the Finance Ministry with plans to make things even
With forecasts indicating that the country’s budget deficit in
2012 will come in more than 60 percent higher than previously anticipated, the
number-crunchers at the Treasury are anxiously looking for ways to close the gap.
Alarmed by a sharp drop in tax revenues, they have decided to do what
bureaucrats with calculators do best: punch in higher figures and make the
public toss yet more money into government coffers.
Marshaling all the
obtuseness at their disposal, the Treasury has floated a proposal to raise
Israel’s value-added tax from 16% to 17% on July 1. This, they say, would bring
the government a windfall estimated at NIS 2 billion this year, as well as a
whopping 4 billion NIS in 2013.
Now at first glance this might not sound
all that bad. After all, what is another 1% between friends? But that argument
simply does not wash.
If a normal household experiences a drop in income
and finds itself spending more than it takes in, the natural thing to do would
be to reduce its outlays.
Why should government be any different in this
regard? Is our bureaucracy so lean and efficient that there is simply no place
left to cut? I doubt it.
Moreover, you do not need an advanced degree in
economics to realize that increasing VAT will reduce consumer spending. When
prices rise, demand falls. This means fewer jobs and less growth, which
naturally results in... you guessed it: less government revenue down the
But the Treasury doesn’t appear to be giving much thought to “down
the road,” preferring instead to focus on a short-term fix, even at the expense
of long-term stability.
Indeed, raising VAT will only encourage greater
tax evasion, driving more economic activity underground and under the table. It
creates a greater incentive to cheat, further eroding standards of honesty and
morality in the commercial sphere.
And then there is the question of
fairness. VAT is essentially a tax on consumption.
But the government
already taxes Israeli breadwinners on their income. In other words, it isn’t
enough that the taxman takes from you when you earn money, he also wants a
larger piece of what you have left when you choose to spend it on
And as many economists have pointed out, VAT is what is known
as a regressive tax.
Since low-income individuals spend a larger
proportion of what they earn on basic items needed for subsistence, a rise in
VAT ends up hitting them harder.
If the Treasury does go ahead with the
planned hike, it would be the third time in the past three years that the VAT
rate has been changed. In the summer of 2009, it rose from 15.5% to 16.5%,
before being lowered back to 16% at the start of 2010.
fluctuations also exact a price, as they make it harder for businesses and
individuals to plan their economic horizons.
To be fair, the primary
concern driving the Treasury is the desire to prevent Israel’s public debt from
ballooning. In recent years, it has fallen steadily as a percentage of GDP to
under 75%. But there are far better and more urgently needed ways to tame the
deficit than to stick the taxpayers with a higher bill.
suffers from a bloated and inefficient public sector where waste is rampant, and
our economy is being choked by monopolies, oligopolies, over-regulation and an
overall lack of competition.
Hence, the Treasury would do best to wield
an axe in the direction of the budget, and compel our 30 government ministries
to tighten their belts.
Cutting the red tape and unleashing the
entrepreneurial power of the Israeli public, rather than taxing them to death,
would go a long way towards reinvigorating the economy.
challenging times, the Finance Ministry would do well to recall the words of
Ronald Reagan, who told an audience at Kansas State University on September 9,
1982, that “Balancing the budget is a little like protecting your virtue. You
just have to learn to say ‘no.’” The last thing we need is another round of
taxing and spending, Israel-style.
If the Treasury is serious about
cutting the deficit, then let it stop squandering money it doesn’t have before
they dare to reach still deeper into peoples’ pockets. In this case, a little
bit of fiscal discipline can go a long way.