The cabinet on Sunday cleared the way for lowering the corporate tax rate from 26.5 percent to its 2013 level of 25%.
“After we identified that the existing corporate tax rate is slowing economic growth in Israel, and in light of the growth in revenues, we decided on steps to reduce taxes to turn the wheels of growth and increase the competitiveness of Israeli companies,” Finance Minister Moshe Kahlon said.
The plan is expected to go to its first Knesset reading on Monday and reach final approval by the end of the month. At the end of 2013, then-finance minister Yair Lapid raised the tax as one of a series of steps meant to counter a runaway deficit. This year, the deficit has stayed well below its expected levels, in part because of increased tax revenues and partly because the government was running on autopilot.
The government collapsed last year over failures to approve a 2015 budget, so it ran on a month-tomonth breakdown of the previous year’s budget instead.
Kahlon set the deficit for 2015 and 2016 at 2.9% of gross domestic product. As of November, however, the 12-month rolling deficit had only reached 2% of GDP, giving the finance minister plenty of leeway to reduce value-added tax from 18% to 17% and slash some other unpopular taxes, such as those on alcohol.
A study released by the Van Leer Institute on Sunday, however, showed that Israel’s tax system is less progressive than many other advanced countries, including the United States.
In 2001, for example, VAT (which is considered a regressive tax because it is spread evenly across the board, hitting the poor relatively harder) accounted for 24% of government tax revenues. By 2013 it had increased to about 32%.
Corporate tax, on the other hand, rose from around 13.5% to 15.5% in the same period, while the share from income tax – a progressive policy tool – dropped from 35% to 26.6%.
Last week, a Finance Ministry study found that lowering income tax increased inequality. Changes in the corporate tax, the study showed, had little effect on income distribution.