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15 Av 5760 - August 16, 2000 | Mordecai Plaut, director Published Weekly








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Home and Family
Purchase Taxes Drop on 630 Items
by Mordecai Plaut

On Tuesday the Treasury reduced purchase taxes on a broad array of consumer items, cancelling taxes entirely on 320 items and reducing them on another 310 items. The total reduction in tax receipts is expected to be NIS 1.3 billion and the "average" family is expected to save NIS 5,000 a year. Purchase taxes on vehicles (65 percent), fuel, alcohol and cigarettes -- which bring in far more money -- are not included in the reduction.

UTJ MK Rabbi Moshe Gafni, who sits on the Knesset Finance Committee, was one of the originators of a Knesset proposal to reduce or eliminate the purchase tax. The proposal was approved in an initial vote and, in committee discussion, the Finance Minister asked that the law not be passed, promising that the government will take a similar step on its own within the next few months. Now it has followed through.

"Lowering the purchase tax on consumer items will be a great help for low income families and will encourage the creation of new jobs," said Rabbi Gafni.

The Treasury divided the products affected into five groups. The first group, small home appliances, will have its 10-45 percent purchase tax abolished. The 30-65 percent purchase tax on large home appliances has been reduced to 10-15 percent. The 10 percent tax on cosmetics has been reduced to 5 percent. The tax on home entertainment equipment, previously 45-85 percent, has been reduced to a uniform 45 percent.

The purchase tax on costs to the business sector, especially the construction industry, was also lowered from 5-50 percent to 0-10 percent.

According to some examples given by the Treasury, the taxes on a washing machine costing NIS 4,000 will be reduced by NIS 490. Tax on a drier costing NIS 2,500 is reduced by NIS 250 and on a dishwasher costing NIS 4,800 by 1,080. A refrigerator that cost NIS 13,000 will be taxed by NIS 2,500 less. The tax on an electric kettle costing NIS 200 will be reduced by NIS 30. When these taxes were first imposed many years ago, many of these were considered luxury items.

Treasury spokesmen said that they expected that prices would be reduced by at least the amount of the tax savings. Economists projected that, although the government will collect NIS 1.3 billion less due to the reductions, the new activity stimulated by the tax cut will increase other receipts by NIS 300 million, meaning that the impact on the budget will be only NIS 1 billion.

The tax burden on the Israeli economy is one of the highest in the world and has increased recently. Tax receipts in real terms increased by 17 percent in the first seven months of 2000 compared with the same period last year. As a percentage of the GDP, taxes are now 43 percent. This step is also expected to reduce the overall tax burden by 0.25% of GDP and to reduce the inflation rate by 0.5%.

Most (85-90 percent) of the goods on which taxes were reduced are imported, so the reduction is not expected to have much direct impact on the local manufacturing sector. The change will help to raise the standard of living in Israel to the norm among the nations of the Organization for Economic Cooperation and Development (OECD).

The purchase tax is called by economists a regressive tax. This is because its economic impact is greatest on the poorest sectors. The fact that the tax paid on an electric kettle is the same for the richest and the poorest means that the poor are paying a greater proportion of their income in the tax. Most of the indirect taxes, which include sales taxes like VAT and purchase taxes, are regressive and, according to Tsipi Gal-Yam, the head of the treasury's economics and revenues division, indirect taxes take in 19 percent of Israel's GDP, compared to 10 to 14 percent of GDP in other developed countries. This reduction is aimed at correcting this situation, at least somewhat. She also said that all purchase taxes brought in a total of NIS 10.1 billion last year, or 8 percent of the state's total tax revenues. The reduction is only about 13 percent of that total, but it can have a great impact by reducing the tax burden on so many of what are now considered basic items.

The Likud called the move "election economics," referring to the fact that the political situation makes it likely that new elections will be held fairly soon, and this move appears to be trying to make the public feel good about the policies of the current government. Finance Minister Shochat argued that the move was the proper one and at the right time in economic terms. Shochat also said that this tax cut is not a replacement for the proposed Ben-Bassat reforms in direct taxation, which are revenue-neutral. However, observers said that the chances of passing any significant portion of those reforms at this time, with the weakened government, seem extremely slim.


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