Good for the rich
Plan to cut VAT has nothing to do with helping the poor
Finance Minister Abraham Hirchson has presented Prime Minister Olmert with a plan to reduce Value Added Tax from 16.5 to 15.5 percent. The proposed level would make Israel's VAT rate the lowest in the world (with the exception of three tiny countries – Cyprus, Malta and Luxembourg).
Hirchson cited several reasons to justify the plan. Most of them were simply incorrect.
The facts
It isn't true that "lowering VAT is mainly intended to help society's weaker elements." Such a reduction would be particularly beneficial to the richer elements of the country's wage earners.
The proposed cut in VAT will put NIS 3.3 billion to the pockets of individual Israelis; of this money, NIS 1.1 billion will go to the richest 20 percent of the country. By contrast, the poorest 20 percent will receive just NIS 400 million.
According to the Bank of Israel research department, the top 20 percent will take 31 percent of all additional available monies, to be created by a reduction of VAT, whereas the poorest 20 percent will get just 12.5 percent.
If the finance minister really wants to help the poor, a reduction in VAT is not the way to go about it. A better way to go would be to introduce a negative income tax that would only benefit the poor.
More mistakes
It also isn't true, as Hirchson says, that "lowering VAT is necessary because the surplus from tax revenues will reach NIS 10 billion this year. We must return some of that money to the public."
According to the finance ministry's tax administration, the country's tax surplus (the difference between planned tax revenues and the amount of tax actually paid) stands at about NIS 5 billion. Nor is there any leftover from VAT revenues; that real growth is about four percent.
The big surplus comes from direct taxes levied on wages and capital gains. Revenues from these taxes rose 18 percent this year.
If the finance ministry wants to give some of this money back to the public, a reduction in VAT isn't going to work. It would be better to use the revenue to offset a negative income tax, or to slash taxes for the middle class.
Spur growth?
Hirchson's claim that "a reduction in VAT would spur growth" is also faulty. All it would spur is consumer demand, a phenomenon that needs no encouragement. Reducing VAT will not drive up the number of people participating in the work force, nor will it give any incentive for people to go out to work.
Economic growth depends on these factors, but to accomplish them, it would be better to use other diplomatic, economic and social tools: Professional retraining, investment in the ultra-Orthodox and Arab sectors, tax credits for low-income workers, and more.
No normal economy would slash taxes on demand when demand is high, nor would it raise them during tougher times.
Spend, spend, spend
It isn't true, as Hirchson says, that "we must cut VAT immediately to strengthen the market." Such a move would actually hurt our potential for basic economic growth because it would encourage people to spend their money today, instead of saving and investing in the future.
The proposal is a plan to send the pendulum of Israel's tax structure swinging from one extreme to the other: private acquisition tax will drop to the lowest in the industrial world, but taxes on savings are already at 20 percent.
The finance ministry is sending a clear message to Israelis: Spend, spend, spend. Don't save for the future. Is this really a wise policy?
Costly populism
The reason Finance Minister Hirchson wants to cut the VAT immediately, today, has nothing to do with economic or social reasons. He wants to make headlines. He uses faulty arguments.
The real problem with the country's economic administration is that there is not enough social and economic funding, and not enough reform to encourage growth.
Cutting VAT won't help any of these things. It is nothing more than a very costly populist move.
