'VAT cut will help working poor'

As consumers directing most of their income to household consumer spending, low-wage earners would also benefit from greater purchasing power, he added.

tax cuts 88 (photo credit:)
tax cuts 88
(photo credit: )
As Finance Minister Avraham Hirchson officially presented his proposal to cut value-added tax (VAT) from 16.5 percent to 15.5% as of July 1, the plan continued to attract an overwhelmingly positive response from a variety of analysts. "This move will increase private consumer [spending], act as a key growth engine for the Israeli economy and reduce the expenses of the consumer public," said Federation of Israeli Chambers of Commerce president Uriel Lynn, calling for further cuts to income taxes for those earning less than NIS 11,140 monthly as a "complementary" measure. Manufacturers, however, argued that surplus state revenues should have been applied to implementing a negative income tax system, and pursuing cuts to taxes on employment, corporate tax and income tax. "I'm not against cutting VAT, but the other solutions would have been better," said Manufacturers Association president Shraga Brosh. "Negative income tax would contribute more to economic growth and employment than lowering the VAT." Brosh also suggested that a "large proportion" of the VAT cut might not trickle down to consumers, citing an internal Manufacturers Association study that concluded that only about one-fifth of the benefit achieved from lowering VAT would reach the poorer three-tenths of the population. Hirchson said that lowering the VAT was part of efforts to make the tax system more socially equitable, adding that the move would increase each citizen's disposable income. Those earning incomes too small to be taxed directly - a majority of Israeli income-earners - would especially benefit from the VAT reduction, he said. As consumers directing most of their income to household consumer spending, low-wage earners would also benefit from greater purchasing power, he added. Indirect taxation as a percentage of GDP here is one of the highest in the world, he said, noting that reducing VAT would balance cuts to direct taxation and bring the country closer to the average among OECD member nations and that of other countries in general. "The level of indirect taxation, which is less progressive, such as the VAT, nearly cancels the progressive effects of [direct] income taxation," commented Ya'acov Kop, director of the Taub Center for Social Policy Studies in Israel, who called the move a "very positive move in the right direction." The relative burden added by VAT to running monthly expenses is felt nearly twice as strongly by poorer households than among wealthier households, Kop said. He was not concerned that the reduction would hurt the public coffers and cause reduced social spending, agreeing with the Finance Ministry that any losses to public revenues would soon be made up by the increased economic activity induced by the move. Israel Institute for Economic Social Research chairman Roby Nathanson, who also favored the move, added that reducing VAT by even 1 percentage point would most likely also help keep inflation in check, by bringing prices down about 0.2 point or 0.3 point. Hirchson said that the VAT reduction was a continuation of a "multi-phase tax reform of previous years," led by former finance minister Binyamin Netanyahu, adding that the additional cut was enabled by surplus revenues expected to accumulate by end of 2006 and several years thereafter. Hirchson attributed the surplus primarily to accelerated economic growth and greater efficiency within the taxation system. Leader & Co. analyst Jonathan Katz said that Hirchson could have cut VAT by 1.5 percentage points to 15%, since the surplus, alongside strong economic growth and ever-increasing revenues left "no fear of overshooting the budget target." "A surplus of nearly NIS 9 billion over the first five months of this year is not going to disappear," he said. Rich willing to pay more to help poor Wealthy Israelis are more likely to support tax increases aimed at tackling poverty than the middle class and poor, a Israel Democracy Institute survey has revealed. While 41 percent of respondents with high incomes and 40% of those defined as wealthy were willing to pay higher taxes to reduce poverty, only 14% of poor respondents, 26% of those with low incomes and 36% of those with median incomes said they would accept such a proposal, according to the survey. Those with left-leaning political views were also more likely to support tax increases to reduce poverty, as well as Arabic-speakers. Fully 48% of those answering the survey in Arabic were in favor, while only 31% of Russian-speakers and 30% of Hebrew-speakers were. Nonetheless, 87.9% of respondents felt that the government does not spend enough money on the fight against poverty, and 63.4% were "very unsatisfied" with the government's handling of poverty and 23.5% said they were "somewhat unsatisfied." The survey sampled 1,204 adult respondents who answered the questionnaire by telephone.