More tax cuts

Perhaps the lack of excitement that greeted the recent cuts is a sign of a healthy economy.

By
June 12, 2007 19:03
3 minute read.
shekels coins 88

shekels good 88. (photo credit: )

 
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For a country whose citizens complain of bearing an exorbitant tax burden and of paying excessively for consumer goods such as electronics and cosmetics, news of the cancellation of purchase taxes on some 100 items has created curiously little stir. Perhaps it's a sign of a healthy economy. In decades past Israelis would not have greeted an announced tax annulment with such apparent indifference. Yet not only is the Israeli public less hungry for big-ticket fare than in earlier decades, but an element of disbelief is also at play here. There's ample reason for suspicion that the benefits won't trickle down to the consumer: In recent months we have witnessed a dramatic weakening of the dollar and a significant shekel revaluation, which in theory should have lowered the prices of imported goods. This didn't happen. The compelling explanation is that it takes time for competition to force importers, wholesalers and retailers to lower costs in the form of price reductions to their customers. And in markets where competition is not sufficiently vigorous, consumers can be deprived of sharing the benefit of changed conditions. Skeptics now suspect that much the same might occur with the disappearance of purchase taxes on a wide gamut of items - from air conditioning and major kitchen appliances all the way to personal grooming products and perfumes. Skepticism is further fueled by the very cold shower with which news of the tax termination was met by politicians, mainly on the Left, and by a range of social activism groups. They maintain that the NIS 400m. revenue loss, which this ostensible Treasury largesse would cause, could be better used to meet pressing, specific needs - from lowering university tuition fees to increasing welfare allowances. Their claim is that tax cuts - of any sort, but particularly those tied directly to consumption - favor the haves rather than the have-nots. This was the prevalent mantra several years back when then-finance minister Binyamin Netanyahu instituted his tax reform. Yet the very fact that the government - then cash-strapped and struggling with a recessionary economy - now possesses sufficient surplus to enable it to eliminate bothersome taxes, underlines that such arguments are overly simplistic. The thorough economic overhaul, against which these critics fulminated at the time, has proved itself to a great extent. It ushered Israel into a prosperous period. The tax cuts which invigorated the economy created more employment and more income for all social strata. The objective of government should not be to tax for the sake of squeezing everything possible from the citizenry but, rather, to facilitate growth. If only a few years after near-national insolvency the Treasury now boasts hefty reserves, there is likely no better use for the money than to hand it back to the citizenry that earned it in the first place. The question is how to hand it back, and the decision to annul the various purchase taxes is certainly no particular bonus for the more impoverished sectors. Nonetheless, all Israeli families, including those on the socioeconomic ladder's lower rungs, are being presented here with potential savings worth hundreds of shekels per year. Appliances like refrigerators or washing machines are not luxuries and are needed in every home. Beyond that, doing away with purchase taxes would constitute another victory in Israel's ongoing war against superfluous bureaucracy and would bring Israel more in line with the countries of the Organization for Economic Cooperation and Development (OECD), which it has been invited to join. Israelis still pay higher taxes than their counterparts in the developed and democratic OECD countries. Whereas the 2005 tax burden in Israel was 37 percent of the Gross Domestic Product, in the OECD the average stood at 32%. The difference is chiefly attributable to indirect taxation (18% of Israel's GDP compared to 10% in the West). There's no excuse or justification for this, especially in the world of globalization. To compete, Israel must free itself of past fetters. The tax burden should be reduced further, but this is not enough. The fundamental need is to maintain the pace of reform that saved the economy and produced the surpluses - to the benefit of all sectors of the Israeli demographic.

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