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Israel's business sector is calling on Finance Minister Avraham Hirchson to continue with government tax reforms and keep cutting income tax according to the legislated schedule.
The calls come in response to reports that Hirchson is considering halting the cuts to help fund the costs of the war in the North.
"If there is indeed a need to raise the tax burden, it would be better to do so through bringing the VAT back up by one [percentage point], but in no way to hurt the reform of reducing income tax on individuals," said Federation of Israeli Chambers of Commerce President Uriel Lynn.
It would be a "grave error" to postpone the reform of direct taxation set down in legislation, he added.
"Reducing income tax on individuals is the central axis of the reform on direct taxation," Lynn said, noting that the cut is "particularly important" in terms of encouraging employment, boosting purchasing power and making the tax system fairer for those earning lower incomes of up to NIS 11,700 per month.
"Beyond all that, it is important to maintain the government's reliability and handle the level of competition in the world," Lynn said.
Manufacturers Association of Israel President Shraga Brosh concurred, arguing that "postponing the income tax reform would hurt the economy's growth and broadcast to the world and to investors inconsistency in the Treasury's economic policy."
Brosh also called on Hirchson to freeze the recently proposed cuts to the budgets of several ministries, intended to cover military costs incurred in the fighting. Revenue surpluses that had built up prior to the war should suffice to fund the war costs while meeting the goals for 2006 and 2007 deficits of 3 percent and 2%, respectively, Brosh said.
The government should continue to pursue socioeconomic aims in education, welfare, investments, research and development, and other fields "vital to achieving social and economic resilience for the economy," he added.
Noga Keinan, chair of the Forum of Chief Financial Officers, suggested that the crisis was in fact a "good opportunity" to broadcast consistency in Israel's economic policy and attract investors put off by the fighting. She called on the government to increase R&D spending, pursue cuts to capital gains tax and hold off on the budget cuts.
"In particular, after part of the economy was paralyzed for five weeks, the cut would increase unemployment and also hurt factories in the North that lost orders related to the government sector," she said.
The CFOs' position paper released on the matter stated that "the country's growth in a time of war requires an accentuated reduction of taxes - even if [only] for a transition period - which would aim to increase business activity and attract investors. The country's growth in such moments requires controlled growth of government spending in the areas and topics that promote growth."
The costs of the fighting could be covered by tapping into reserves, fundraising and a "controlled increase" to the deficit, the CFOs said.
According to then finance minister Binyamin Netanyahu's tax reforms passed by the Knesset last summer, the maximum marginal income tax is to drop from 49% to 44% by 2010.