A further tax increase will be required even after the government reduces its expected expenditures so as not to deviate from the budget approved under the "fiscal rule." According to the same rule, the 2014 budget can be only NIS 20 billion ($5.5 billion) higher than last year's budget, while the previous government committed to a double addition of NIS 40 billion ($11 billion).
Finance Minister officials explain that the gap stems from a particularly slow economic growth, as well as wrongly relying on "exaggerated and even groundless" assumptions in regards to the addition to the State's coffer by raising taxes on those earning a particularly high income and on income from capital gains, which went into effect this year.
Collecting taxes from what is known as "trapped profits" is likely to be "disappointing" too. The Treasury has restudied the data and reached the conclusion that predictions that "trapped profits" would to NIS 100 billion ($27 billion) or more were not based on a realistic analysis of the companies' balances.
In order to collect another NIS 14 billion, senior Treasury officials will advise new Finance Minister Yair Lapid to increase all income tax rates by 1-2% and raise the value added tax by 1%.
They will also recommend that he reduce some of the tax benefits ("exemptions") including in regards to sensitive issues like encouragement of investment, study funds and VAT on fruit and vegetables.
Nonetheless, memos prepared by the Treasury say clearly that canceling the entire Encouragement of Capital Investment Law – and not just reducing benefits given to exporters – will not infuse money into the coffer in the next two-three years. Even later, the State's income will increase "as long as there is no change in the companies' conduct."
According to a senior Treasury official, "The small value of investments in Israel's GDP explains, according to the Bank of Israel, about half of the gap in labor productivity between us and developed Western countries. In light of these figures, can the government stop encouraging investments, especially as there will soon be a dramatic turn for the worse in the workforce growth?"