In surprise reversal, Lapid scuttles planned 2014 income tax hike

Finance Minister has faced public pressure to undo planned tax hikes he warned of when he came into office.

lapid test1 (photo credit: REUTERS)
lapid test1
(photo credit: REUTERS)
Income taxes will not be rising in 2014 after all, Finance Minister Yair Lapid announced on Monday.
“Eight months after my appointment to this government is a good time to assess the situation anew,” Lapid said at a press conference Monday evening in Jerusalem. “I would like to announce that we have decided to cancel the increase in income tax that was meant to go into effect on January 1. We will go to the government and the Knesset to bring down income tax.
“This is a decision that was taken carefully, after thorough discussions,” the minister added, “and this decision will help us confront the fact that we still have great challenges in raising the growth rate.”
With deficit numbers coming in well below their expected target of 4.65 percent of GDP in 2013, Lapid has faced public pressure to undo tax hikes he had planned, when he came in as finance minister, for 2014.
The hikes, which would raise income tax from between 1-2% depending on tax bracket, were one of several of Lapid’s tax increases, including a 1% increase in value-added tax, new taxes on alcohol and cigarettes and higher corporate taxes.
The income taxes in particular, however, were politically difficult given Lapid’s constant campaign promises not to rely on the middle class to fund the government, promises that were subsequently amended to say he would not tax “only” the middle class.
Several factors have helped bring the deficit down to about 3.3% of GDP in the 12 months through October, giving Lapid extra flexibility: his own tax changes; the income tax increase that went into effect at the start of the year; lower than expected expenditures; and several high-value foreign acquisitions that produced higher than expected tax revenues.
A change to the Central Bureau of Statistics’ formula for calculating GDP, the measure for the size of the economy by which deficit targets are set, also worked in Lapid’s favor.
Even with all those changes, the projected budget deficit for 2014 was expected to precisely hit the 3% mark, according to the Bank of Israel. Revoking the income taxes will push the deficit up.
Lapid said the change would make the lives of Israel’s middle class easier, though he may also face criticism for choosing to undo the income tax increase, which falls more on the rich, instead of the VAT increase, which has more significant repercussions for the poor.
In a September interview with The Jerusalem Post, Lapid vowed to wait until 2014 to make any decisions on new taxes, though he expressed a strong desire to bring tax rates down.
“I said from day one, if economics will allow us to, in the future – meaning this is not something we can look into, because the details now are very vague and changing daily – my goal always was to lower taxes if possible.”
In response to Lapid’s announcement on Monday, Shas leader Arye Deri said the finance minister was mocking the citizens of Israel by using an old trick of taking money away and giving it back later to improve his image.
“The State of Israel and its citizens are not tools for manipulations and games,” said Deri. “What was taken from the citizens of Israel must be returned.”
Likud MK Gila Gamliel, who heads the coalition’s efforts in the Knesset Finance Committee, said “it is unfortunate that it took so long for Lapid to internalize his mistake, and meanwhile the public had to carry on with such frustration.”
MK Itzik Shmuli (Labor) said everyone is happy to pay lower taxes, but the fact that the finance minister keeps changing his mind should worry Israelis.
“Just four months ago, the same finance minister passed a cruel budget that will hurt the workers and the poor,” he said. “Now it looks like he scared us for nothing. Lapid wants to be Robin Hood but he looks bad in this story. Either he did not understand things before, or he purposely planned everything in advance and, if so, he is a cynical politician.”