'Gov’t fiscal policy causes unequal income distribution'

Van Leer Institute position paper says Netanyahu policies have led to an increase in indirect taxes.

June 15, 2011 23:39
2 minute read.
Prime Minister Binyamin Netanyahu

Prime Minister Binyamin Netanyahu dark 311 (R). (photo credit: Avi Ohayon / GPO)


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The government’s fiscal policy is not consistent with what it preaches, two economists from the Van Leer Jerusalem Institute argued in a new position paper published Wednesday.

They claim that Prime Minister Binyamin Netanyahu’s opposition to raising direct taxes has led to an increase in indirect taxes that in turn has caused more unequal distribution of income.

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Professors Avia Spivak and Nathan Zussman submitted that Israel is in an unusual position within the OECD, in that it focuses particularly heavily on indirect taxes, such as the value-added tax. This indirect tax burden strikes at the government’s ability to fulfill its aim of bridging the gaps in income distribution, they said. The situation would likely worsen if the government carries through with a plan to further lower direct taxes, such as income tax, they added.

To illustrate their point, the authors demonstrated that in 2009 Israel collected indirect-tax revenues to the tune of 14.49 percent of GDP, while direct-tax revenues constituted 16.9% of GDP.

In other words, indirect-tax revenues amounted to about 86% of direct-tax revenues, putting Israel behind only Chile, Mexico, Turkey and South Korea among developed countries in its reliance on indirect tax to fund government expenditure.

In every other country to which Israel was compared, indirect-tax revenues totaled no more than 70% of directtax revenues. In Switzerland, Austria, Belgium and Spain that figure added up to no more than 40%.

Part of the problem appeared to lie with the implementation of the government’s two-year budget for 2011- 12, Spivak told The Jerusalem Post Wednesday by phone. The unorthodox approach had caused the government to overspend in 2011, meaning it was playing catch-up to meet its targets the following year, he said.

“The whole idea of the two-year budget was to create some order: ‘Here is a two-year plan, we know exactly what will happen, there is a path, we won’t need to have arguments between political parties again in one year’s time,’” Spivak said.

“[But] what did we get? We got disorder.”

Spivak and Zussman presented their findings Wednesday evening at the Van Leer Jerusalem Institute before an audience that included Bank of Israel Deputy Governor Zvi Eckstein, Knesset Finance Committee Chairman Moshe Gafni and Eyal Epstein, deputy director-general of the Finance Ministry’s Budget Department.

“I think that it’s very important that Gafni know that there are some inconsistencies between the main aims in the government budget,” Spivak said, added that the same message was also sent to the government last year prior to the budget deliberations and was ignored.

“The Bank of Israel has written similar things [too],” he said. “We are not saying anything particularly out of the ordinary.”

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