Economics: Give us a break

This week, Prime Minister and Acting Finance Minister Ehud Olmert announced a purchase-tax cut on popular consumer items. Why - and why now?

olmert 88 good  (photo credit: AP)
olmert 88 good
(photo credit: AP)
In what detractors are calling the latest display of checkbook politics, Prime Minister and Acting Finance Minister Ehud Olmert this week axed the purchase tax on more than 100 consumer items, including air-conditioners, refrigerators, washing machines and land-line telephones - a move that will cost the government an estimated NIS 400 million in tax revenue. At the signing of the order on Sunday night, Olmert said that the move is part of the government's "long-term policy to reduce taxes and create an effective tax program with the goal of generating growth." The question is: Why now? Cynics might attribute the timing to Olmert's need - in the wake of the Winograd Committee's interim report and the precarious security situation in the South and the North - to reverse his all-time-low popularity ratings. But it's more complicated than that. The tax breaks are coming at a time when the government is awaiting final acceptance from the Organization for Economic Development and Cooperation (OECD) into its exclusive club. Israel has been attempting for over a decade to gain entry into the 30-member group, in order to position itself among developed economies and help attract international investment. Just last month, the OECD invited Israel to membership talks where it laid out the conditions and process for the accession. "Every country that is a member of the OECD has its own tax program and policies," said Dan Catarivas, head of the Foreign Trade and International Relations division in the Manufacturers' Association of Israel. "However, this [Olmert's] step does help align Israel with the OECD benchmarks." Israelis still pay higher taxes than citizens in OECD countries. In 2005, revenues from taxes in the country accounted for 37 percent of the Gross Domestic Product, while the OECD average stood at 32%, according to figures from the OECD. Tax revenue in Israel is generated from direct taxes, which include income tax, health tax and national insurance tax, and indirect ones, such as Value Added Tax (VAT), customs tariffs and purchase tax. According to the details of Olmert's plan, which was drawn up by representatives from the Prime Minister's Office, the Finance Ministry and the Tax Authority, consumers will only save 2% on air-conditioning units, 2%-3% on cosmetics and 5% when buying a land-line telephone, although the Finance Ministry claims that the savings per family unit are expected to total hundreds of shekels a year. Dr. Roby Nathanson, director-general of the Microcenter for Political Economics, however, feels that the tax cuts are insignificant. "It won't really affect the purchasing power of the mid to upper classes and for those who are living below the poverty line - they aren't going to be purchasing air-conditioners and cosmetics anyway," he explained to The Jerusalem Post. "What we really need to do is take care of reducing VAT." Nathanson added that he believes the measures were adopted as a way for Olmert to conform to principles of bilateral trade agreements and to move the country into compliance with international standards which stipulate that specific purchase taxes shouldn't be imposed on specific consumer goods. Nathanson also noted that the reduction itself comes during the middle of a sharp increase in prices of durable goods that has produced large collection surpluses, in excess of NIS 10 billion, so a NIS 400 million loss in revenue is actually not that much. "WHATEVER OLMERT'S motivation for slashing these taxes," said Uriel Lynn, president of the Federation of Israeli Chambers of Commerce earlier this week, "we feel that this is a step in the right direction, and an important move for social justice." Lynn, who served as governor of state income, stressed, however, that while the plan may inspire increased consumer spending, the real issue that must be addressed is the amount of tariffs that are paid in customs, and income tax for wage earners in the third and fourth tax brackets. "Those who earn NIS 4,170-NIS 7,420 are taxed a total of 34% in direct taxes, while those who earn NIS 7,420-NIS 11,140 are taxed 41%," explained Lynn. "These numbers must drop, in order for people really to be able to start saving money." Olmert introduced his plan as being the key to the country's future economic success. However, the thinking seems to be that unless it is followed by "real" tax breaks, it won't make that much of a difference.