Last week the Finance Minister announced tax cuts for the
lower and middle classes and corporate tax reductions and
incentives for the construction industry.
Announcing tax cuts for those earning between NIS 4,000 and
NIS 10,000 per month, Finance Minister Binyamin Netanyahu
said the tax breaks will increase disposable income for 70
percent of salaried workers and help accelerate economic
growth.
The idea of creating tax cuts for low- and middle-income
earners came as the Finance Ministry collected NIS 39 billion
in taxes during the first quarter, a 12.4 percent increase
over the same period last year. With 2004 tax revenues
expected to be NIS 6 billion to NIS 8b. higher than the
Finance Ministry's earlier projections, the question now is
how to use the newly available funds.
Netanyahu is convinced that tax cuts will bring about
economic growth, more competition, and a stronger financial
market. For him, the planned cuts are the third stage of his
economic recovery program. If they are approved by the
Cabinet and Knesset by July as planned, his goal is to
accelerate economic growth by encouraging demand, investment,
creating jobs, and raising the standard of living. The
Finance Ministry is forecasting 2.8 percent growth for 2004,
and more spending will ensure that the forecast comes
true.
Last week the Bank of Israel raised its estimate of growth
for 2004 to 3.4 percent, indicating that the measures so far
are on track and suggesting that there will be even more
money to give out before the year is over.
At the same time, there were several options available. One
was to pay off some of the deficit, which has been growing
each year.
In the long term, paying off the public debt will benefit the
economy. That was the option that Bank of Israel Governor
David Klein favors. He has repeatedly called on the
government not to "indulge" in further tax cuts but to funnel
any additional tax revenues toward paying off the growing
national debt. According to Klein, favoring tax cuts over
reducing debt could "seriously undermine Israel's economic
credibility."
At present, the average debt among member countries in the
Organization of Economic Cooperation and Development is 48.6
percent of GDP, while US debt is 46.9 percent and the average
debt among European Union countries is 50 percent. Israel's
debt is 105 percent of GDP.
But Netanyahu believes that the tax cuts will encourage
growth, ultimately reducing national debt and ensuring
economic credibility in the global market. Lowering taxes is
also much more popular than reducing debt. With the proposed
tax breaks, those earning NIS 10,000 a month will see their
net income rise by NIS 180 a month.
Finance Ministry were also probably concerned with the
political aspects of having millions of shekels lying around.
If ministers became aware that there is money, they will
apply political pressure to increase spending.
That fear created more of an impetus for Netanyahu to use the
money immediately, and the fastest way to do that was by
moving to lower income and value-added taxes.
Israel's income-tax brackets rise quickly relative to income,
with middle-income earners paying close to half of their
salaries in income tax, national insurance; payments, and
health tax. The tax brackets end up encouraging people not to
work or to conceal income from the tax authorities.
Given Netanyahu's long-term plans for creating a Western-
style economy with little government involvement, one analyst
said, the tax cuts are a move in the right direction.
