VAT cut won't necessarily benefit consumers

The indirect tax burden in Israel is too high, and the direct tax burden is too low.

June 29, 2011 23:31
2 minute read.
cottage cheese

cottage cheese 311 R. (photo credit: Marc Israel Sellem)


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Value-added tax (VAT) is easy to understand. It has a predetermined rate, and, theoretically, it is easy to calculate the rise or fall in the price of a good or service if the VAT rate changes. It is therefore no surprise that changing the VAT is proposed from every side whenever a social problem arises, or there is a desire to benefit a certain constituency.

The latest proposal follows the rise in food prices and the growing discomfort in Israeli society. Under these circumstances, what is ostensibly more logical than to lower VAT on basic goods in the hope that the lower price will be passed on to the consumer? It sounds logical, until the significance of the idea is considered. Not only is the definition of “basic good” full of controversy and tensions between various sectors, there is a feeling that, ultimately, the consumer will not feel any lower price and VAT’s big advantage will be lost – the simplicity of its collection.

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When there are several VAT rates, the consumer does not always know what is the rate that he should pay and gets stuck with the highest rate.

This does not mean to say that changes in taxation cannot be used to protect low-income earners from rising food prices. Under other circumstances, in a country where the government does not set its tax policy on the principles of the Tea Party in the US, it is understood that a much more thorough change is necessary in the tax system.

Put simply, the indirect tax burden in Israel is too high, and the direct tax burden is too low.

A sweeping sharp reduction in the VAT rate can lower prices, but it is necessary to simultaneously raise the marginal tax rates on high incomes to prevent an increase to the budget deficit. The tax rates levied are a function of what you want to achieve and what it is possible to get passed in the Knesset.

The rule is simple: If you want to change something by means of the tax system, you should first think about what is likely to happen and what could go wrong.

During the cottage cheese protest, people at Tnuva Food Industries Ltd. were right to say that the solution to the problem is some kind of package deal. But the components of such a deal are very different from the issues discussed by Tnuva and government officials. Such a package deal should also include changes in the tax system, based on the principles outlined above, as well as measures to increase competitiveness in various industries and not necessary in the food industry.

In this case, the “compensation” for the higher price of food could be lower prices for other goods and services, such as telecommunications.

The phrase “price controls” should also be considered less ideologically and with a bit more common sense. Tnuva and the other food companies did not raise prices of their products just because of higher input costs; they did it because they could exploit their market power. In places with such marketers, it is both possible and desirable for regulators who think about the good of the public

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