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Finance Minister Moshe Kahlon (L) and Prime Minister Benjamin Netanyahu, September 3, 2015 .(Photo by: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Israel's new tax plan or an act of political revenge?
Israel’s economy is strong now, but how will these steps be funded in the event of an economic slowdown?
Not everyone is happy with Finance Minister Moshe Kahlon’s tax plan announced this week.

Prime Minister Benjamin Netanyahu certainly isn’t happy, because Kahlon sprung the plan – which provides tax breaks for working parents, subsidizes after school activities, increases benefits for the working poor and cuts duties on baby clothes, shoes and mobile phones – without any advance notice or consultation.

What’s more, after being stiffed by Netanyahu on the public broadcasting corporation, Kahlon got his revenge and put the prime minister in a bind: Object to the plan and he comes across as insensitive to the needs of working families; let it pass and Kahlon scores political points.

I’m not happy, because I’m still paying off tens of thousands of shekels in debt accrued from paying for kindergartens, after school activities, over-priced baby clothes, diapers and the like; my kids have just passed the age which would make me eligible for tax breaks; and I can’t afford a premium model cellphone, which would now cost me a lot less if I could.

In other words, once again I’ve fallen between the cracks and won’t get anything from the finance minister’s latest plan, other than perhaps a pair of shoes.

While making life easier for working parents, helping the working poor and encouraging employment are worthwhile steps, other parts of Kahlon’s plan are perhaps less so. Do we really need cheaper premium model cellphones at the expense of cutting duties on more basic items such as groceries, which remain outrageously expensive?

The point is that no debate was conducted as to how Israel should spend its budgetary reserves and excess tax accumulation – and as economists point out, there is no excess tax collection, just higher than forecast accumulation. The government is still running a deficit. Kahlon put out his plan without any discussion, consulting neither ministries affected by the plan nor professional echelons such as the Bank of Israel or the National Economic Council, not to mention the prime minister.

His hasty steps appear to have been the result of political maneuvering ahead of a possible election, not economic judgment. Kahlon labelled his plan the “Net Family Plan,” but it would be more accurate to label it the “Net Political Plan,” even if it does have many positive elements.

It is yet another example of how Israel’s fragmented political system leads to poor governance and cynical political machinations, with each coalition party operating for its own interests rather than the national interest.

Israel’s economy is strong now, but how will these steps be funded in the event of an economic slowdown? Kahlon and the Treasury clearly recognize that, and some of the measures are in fact not permanent but fall under a two-year temporary legislation. Perhaps the money would have been better spent on taking steps to ensure future economic growth.

The Bank of Israel addressed those questions when, in welcoming measures to encourage employment, it warned that, if the changes are to be made permanent, the government would need to find additional funding if it is to meet its 2019 and 2020 budgetary targets.

BoI Governor Karnit Flug has made it clear over recent months that she is against using excess taxes to fund tax cuts, arguing for long-term investment in education and infrastructure, a sentiment that the BOI repeated in addressing the Kahlon plan.

“In addition to the plan presented, it is important that the government will continue to take policy measures that will bring about an improvement in human capital infrastructures and physical capital in the economy and thus increase the potential for growth of the economy in the long term,” the BoI said.

But with talk of election in the air once again, long-term economic thinking and taking tough measures to bring down the cost of living, in particular generating competition for local monopolies, is the last thing on anyone’s mind. With another tax windfall due from the sale of Mobileye to Intel, Netanyahu and Kahlon will be competing to see who can be more generous with their electorate.
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