OECD chief: Social justice cannot be achieved through the tax system
OECD economists find plan to change Israel’s VAT wrong and inefficient, asserting best way to deal with the unequal distribution of income was to create a system of social and welfare services.
“The right way to achieve social justice is not through the tax system,” OECD Secretary-General Angel Gurria told Israel’s Calcalist business daily in an exclusive interview held in recognition of Israel’s 5th anniversary as an OECD member.
“Don’t breach the tax system, don’t put holes in it, don’t create tax exemption, don’t do differential taxation. Otherwise you’ll end up with a tax system that looks like gruyere cheese," Gurria, currently in Washington, added. “If you put holes in the system you won’t be able to collect all the money you plan, and a lot of people will take advantage of the system”.
Gurria’s comments come in the midst of a debate between Israel’s largest party, the Likud, and its prospective coalitional partners, mainly over axing the Value Added Tax (VAT) on regulated foodstuff and possibly more products.
According to Gurria, this would be wrong and inefficient insofar as it would increase costs and would defeat the purpose.
At the end of 2013, Secretary-General Gurria addressed a special session held by the Israeli government in which he presented the OECD’s periodical survey of Israel’s economy (usually conducted once every 18 months). He sat next to Prime Minister Benjamin Netanyahu and commended Israel’s economy while pointing out its strengths as well as its weaknesses.
One of these strengths, according the survey, was Israel’s uncomplicated and uniform tax system – particularly its VAT system. While it is true that Israel is overly dependent on revenues from VAT – which together with taxes on private consumption, gas, cigarettes and so on, comprises 50 percent of its total tax revenue – the OECD economists determined that admirably, Israel’s VAT system is uncomplicated and uniform and does not allow exceptions, aside from the exemption on fruits and vegetables and the zero-VAT policy in (resort town) Eilat.
According to the OECD economists, this stands in contrast to other OECD members that have a differentiated VAT system for different products, which is ineffective when it comes to changing the distribution of income, since it is the wealthy who enjoy the lion's share of these tax benefits.
In that same survey, the OECD economists asserted that the best way to deal with the unequal distribution of income was to create a system of social and welfare services.
At the time of its publication, as with previous such surveys, Prime Minister Netanyahu prided himself on the strength of Israel’s VAT system.
And yet, prices on some food products remain very high in Israel. Perhaps a differentiated VAT system or VAT benefits are the only way to help people deal with these prices?
“You’re trying to solve a problem of prices through the tax system. You should solve it with economical policy. You should try and fix the problem itself and not by creating distortions in the tax system. If you want an efficient VAT system, don’t do exemptions or differential VAT. Take a hard look at the origin of the price distortion but don’t make holes in the tax structure because you will weaken it. The right way to make social justice is through the expenditure side, by subsidies and services for certain parts of the population, according to your political and social priorities,” Gurria said.
