On January 15, 2024, cabinet members approved raising the VAT by one percent, as part of the state budget approval. It was decided that the increase would take effect in January 2025. The Finance Ministry pushed to execute the move following the high war expenses, the deepening deficit, and the need for available money here and now.
Now, right at the end of the term, four months before the elections, that same government seeks to reverse that decision. Construction and Housing Minister Yitzhak Goldknopf is promoting a bill to reduce the VAT back to 17%, despite the resolute opposition of the Ministry of Finance. On the face of it, this is good news for consumers, but it is difficult to ignore the timing. For most of the term, Goldknopf did not lead struggles against the cost of living, and precisely now, just a few days after heading the protest against the arrest of yeshiva students evading enlistment, he presents himself as someone fighting for the public's pocket.
It is difficult to ignore the fact that Goldknopf was not among those opposed to raising the VAT. On the contrary. In January 2024, he raised his hand in favor of the decision that raised the tax to 18% and burdened every family in Israel. Now, four months before the elections, the exact same minister seeks to lead the reversal of the move and brand himself as someone fighting the cost of living.
According to the bill, the VAT will be reduced from 18% to 17%. This is a tax imposed on almost every product and service, and therefore any reduction of it is supposed, at least on paper, to reach nearly every household in Israel. However, the Ministry of Finance and the Tax Authority believe that the picture is far more complex, and that behind the promise of a price reduction hides a heavy budgetary price.
"The proposals to reduce VAT are disconnected from the budgetary needs of the State of Israel," senior Finance Ministry officials told Walla. "And therefore, like many other proposals, they will not be adopted by the government.
"The State of Israel succeeds in coping with major challenges precisely because of responsible steps related to budgetary responsibility and restraint. It is easy to scatter declarations about lowering taxes, without understanding the economic significance and without addressing the price and the consequences."
The Finance Ministry reminds that raising the VAT at the beginning of the term was not an ideological move, but a decision intended to cope with the spike in state expenses following the war. From their perspective, the reasons that led to raising the tax have not disappeared. The defense budget continues to grow, the rehabilitation of the North and the South is still far from completion, and the deficit remains high. Therefore, they say, canceling the VAT increase will create a hole of billions of NIS, without a budgetary source being presented to finance it.
The Tax Authority also opposes the move. According to the authority's assessment, reducing the VAT from 18% to 17% will deduct approximately NIS 8.5 billion a year from the state treasury. This is no longer a cosmetic change in the tax rate, but a huge sum that someone will have to finance, whether through cutting other budgets, raising taxes in the future, or increasing the deficit.
Beyond the budgetary price, the Tax Authority also doubts the promise that the price reduction will reach consumers in full. Experience shows that in centralized markets, part of the VAT reduction remains with the manufacturers, importers, or retail chains. In other words, the state might forgo an income of NIS 8.5 billion a year, while the consumer receives only a partial price reduction, if any at all.
This is also one of the reasons why for years the professional echelon opposed broad reductions of the VAT. The Finance Ministry and the Tax Authority preferred to address the cost of living by increasing competition, opening the market to imports, removing barriers, and reducing centralization, based on the perception that a price reduction resulting from competition lasts over time, while a tax reduction does not necessarily reach the pocket of the consumer.
On the other hand, proponents of the proposal argue that VAT is the least equitable tax in the tax system. Rich and poor pay the same rate on every purchase, and therefore its reduction is supposed to reach every household as early as the next purchase at the supermarket, the pharmacy, or from a professional. This is also the reason why reducing the VAT is a move that is easy to explain to the public, especially at a time when the cost of living continues to preoccupy almost every family in Israel.
However, even if the idea itself is worthy of discussion, it is difficult to ignore who is leading it and when. Not only did Goldknopf not oppose raising the VAT two years ago – he voted for it. Now, four months before the elections, and after heading the struggle against the arrest of yeshiva students evading enlistment, he seeks to lead the opposite move and present himself as the Robin Hood of the cost of living.