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
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