Economists of the OECD, who have been visiting in Israel in recent months, are certain that if the government wants to meet its 3% deficit target without raising taxes, the Israeli economy will have to grow at an average rate of 4%.
The government confirmed Sunday Lapid's proposal to cancel the hike in income tax rates. Lapid – who initially suggested the hike – decided to back down from the idea after new estimates revealed the government's expenditures shrunk by NIS 1.3 billion (roughly $370,582,000).
According to the new estimates, the growth will rise to 3.6% and the deficit will stand at NIS 31.4 billion (roughly $8.95 million)
"Assuming that the Israeli economy won't grow at 4% a year in the coming years, the government will be forced to implement other cutbacks," the OECD report said, noting that the current growth rate is under 4% and that it is unlikely that it will reach that number in coming years. Therefore, a significant part of the report is dedicated to how Israel needs to raise its income by raising taxes.
The OECD economists said that the government should prefer to take measures that will broaden the base tax, such as by canceling tax exemptions or increasing royalties and fines, instead of raising major taxes, such as the value-added tax, excises, or property tax.
Mainly, the organization recommended raising taxes on actions that are considered harmful, such as industrial activity that causes air pollution. As well, it recommended canceling the company car exemptions and a surplus tax for those entering Tel Aviv.
The organization also recommended increasing enforcement on tax evaders, and increasing the awareness that proper tax reports must be filed. Some of the tax exemptions that the OECD recommended the government cancel are the exemptions for high-income earners, those who retire early and the tax exemptions that are given on pension funds.
Nonetheless, the economists of the OECD admitted that despite taking all these measures, it might not be enough for the government and it will still need to raise essential taxes. Therefore, the OECD did not recommend raising the taxes on gas or real estate, saying that their current tax rates are some of the highest in the developed world. They also warned not to raise the company tax, which will damage the attractiveness of opening new businesses in Israel and cause investors to look elsewhere. A raise in income tax is also something that must be done carefully, if done at all.
VAT issuesRaising the VAT, however, may be an option. "If the VAT is raised, it will hardly damage the business world and the growth of the economy," the report said, recommending that first and foremost the tax exemption on fruits and vegetables and the exemption in the city of Eilat be canceled.
Members of the organization said they knew that by canceling the VAT product prices will raise, which will ultimately hurt those at the lower ends of the economic spectrum, whose income is dedicated completely to spending and not saving. They also said, though, that the government's income structure is biased in favor of VAT-collection, so much so that with each raising of the VAT, fewer and fewer funds will reach the government because the citizens are forced to cut back on spending.
In order to offset the VAT being raised, the report said, in order to protect the weaker parts of the population, the government can increase its hand-outs, as long as they don't become an excuse for citizens not to go out and find work. Therefore, the OECD economists also recommended broadening the use of negative income tax.
One tax that the OECD actually said must be lowered is the vehicle tax, and at the same time it's worth it for Israel to continue lowering the taxes on exports.
The OECD recommendations are based on the assumption that the budget will remain as planned. With that, Finance Minister Yair Lapid said two weeks ago that he is weighing the option of slowing down the budget's growth to 1.7% from today's growth rate of 3.5%-4%. If this happens, the government will be able to pass on part of the OECD recommendations.