Finance Ministry chief economist resigns over Lapid's housing tax exemption

Michael Sarel says Lapid's plan to eliminate Value Added Tax from sector is wrong "from every perspective."

Yair Lapid  (photo credit: Reuters)
Yair Lapid
(photo credit: Reuters)
Finance Ministry chief economist Michael Sarel resigned from his position on Wednesday over disagreements with Finance Minister Yair Lapid’s housing policy.
Lapid has proposed to cancel the 18 percent value-added tax on first home purchases for young couples who have served in the IDF or national service.
An additional proposal would impose strict restrictions on rent, only allowing landlords to raise rent every three years, tying it to the inflation rate in the interim.
Both measures are set to be considered by the housing cabinet on Monday.
In a letter to Lapid that he shared with the media, Sarel said he was stepping down to protest Lapid’s plan to eliminate the VAT for some firsttime home-buyers, which he said was “wrong in my opinion from almost every possible perspective.”
The policy, he argued, would not achieve its goal of lowering housing costs.
Though it would be good for the people who receive the benefit, it would require new taxes to cover the annual NIS 2 billion cost, shifting the burden onto the rest of the population.
It would also impose a heavy financial and bureaucratic burden on the government, which would have to verify all the applications and ensure that buyers would not sell within five years, as required, he said.
Tax exemptions are popular, and thus difficult to overturn, even if they don’t work, Sarel said, citing VAT exemptions on fruits, vegetables, and purchases in Eilat. A 1986 work tax credit that was supposed to remain on the books for only a year is still on the books today, he said.
Notwithstanding the policy’s popularity, he said, there was a solid professional consensus that it was a bad idea.
Sarel said that although it would be inappropriate to step down over normal policy disagreements, “my claim is that this specific instance is exceptional in its severity and broad repercussions, which leaves me no plausible other alternatives.”
Despite the fact that he thought Lapid had overall set “excellent” economic policy until this point, Sarel went public with his protest to “prevent my name from being associated with this policy.” He was willing to remain in his position until the bill became law, he said.
In a statement, Lapid said he regretted Sarel’s decision, but thanked him for his service.
Sarel’s resignation followed a stormy day of criticism for the VAT policy.
Several construction organizations noted that the plan did not tackle the heart of the issue, which is a shortage of supply.
The Abraham Fund, an NGO dedicated to Arab and Jewish coexistence, slammed the proposal as discriminatory, saying it was “designed to ease the housing crisis but excludes from it the vast majority of the Arab minority in Israel through the conditions.”
The army or national service requirements, which would similarly exclude ultra-Orthodox Jews, might make it hard for the High Court of Justice not to strike down the law.
“The idea is not particularly good,” Rafi Gozlan, chief economist at IBI Investments, said.
“Lapid’s solution enhances demand instead of moderating it. It’s clear that a portion of the discount that is supposed to go to young couples will go to contractors in the end.
“Lapid had better listen to what the Bank of Israel governor has to say regarding increasing the tax burden on investors through purchase or property tax,” he added.
Reports that Bank of Israel Gov. Karnit Flug was bitterly opposed to the VAT exemption leaked on Tuesday night, garnering sharp rebukes from members of Lapid’s Yesh Atid party.
“It is inconceivable that the person at the head of the body that failed these past few years in its attempts to bring down the price of housing, and was among the decision- makers for many years, would attack the finance minister’s brave step, which provides an immediate answer to young couples who cannot afford a home,” Yesh Atid MKs Aliza Lavie and Karin Elharar said in a joint statement.
Many politicians – including some whose economic views differ significantly from Lapid’s – offered him praise.
“I congratulate Yair Lapid for discovering socialism,” Labor MK Itzik Shmuli said, though he warned that landlords expecting price controls were likely to raise rents as much as possible before the proposed rule went into effect.
Labor MK Shelly Yacimovich criticized the government, and Prime Minister Netanyahu in particular, for failing to act sooner.
“Five years you’re the prime minister. The housing issue was your flagship in 2009, in 2013, and what did we get? A 50 percent increase in housing prices,” she said. Lapid was just following in his footsteps with gimmicks, she said.
The low interest rate environment has helped drive demand for investing in housing, which Flug has noted is an unfortunate side effect of policies designed to keep the economy growing, exports strong and unemployment low.
The Bank of Israel has installed a series of regulations to limit foreign investments in the housing market.