Bibi’s Taxes–Value Subtracted

Haim Watzman

Gershom and I had an argument back in 1996, when Binyamin Netanyahu was elected to his first term as prime minister. Gershom claimed that Bibi was, at core, a radical right-wing ideologue, whereas I argued that he was an opportunistic hack.

In that term, Bibi went on to prove himself a devout Republican-style capitalist on the economic front and a territorial maximalist on the diplomatic front. But, in the wake of the government’s approval of the national budget yesterday, I think I might win the argument this time around. Over the past week, Bibi has swayed, bent, and ended up breaking most of his principles. The result is a budget that is a mishmash. It’s not the tax-cutting, small-government budget he promised, nor is it an Obama-style Keynesian economic recovery budget. It’s the worst of both.

One of its weirdest provisions is the hike of one percent in the value added tax, to 16.5 percent, and the decision to levy the tax, for the first time ever, on fresh produce. No one likes tax hikes, nor do people like filing their tax returns for the year. Luckily, software exists to help people do this and you may even find TurboTax deals online too. If you are running a business, you may want to try professional tax services similar to those from somewhere like Dave Burton, that may be able to provide you with a tax accountant nyc who might be able to help manage or sort the taxes for your business.

With Israel, like the rest of the world, facing recession, national economic policy needs to encourage consumption. Raising this consumption tax does the opposite. Goods and services will cost more, and people will buy less. Economic activity will slow, jobs will be lost, and people will buy even less.

Furthermore, the VAT is a regressive tax. It’s paid by all Israelis, and since the poor and middle class (this includes the authors of the South Jerusalem blog) spend nearly all their income and have little to save, they pay a higher proportion of their income in VAT than do rich people. Imposing it on basic goods like produce makes it even more regressive.

True, a neutral tax policy that does not favor one sector or another is generally a good idea. It could be argued that the traditional exemption of produce from the VAT is, in principle, not ideal. (Produce was exempted when the VAT was first imposed in the 1970s simply because most produce was then sold in open-air markets on a cash basis, making the enforcement of the tax nearly impossible.) But to impose it when a recession is looming is to place ideology over good sense.

Israelis like to claim that they pay unreasonably high taxes, and refer to OECD figures from 2005 showing that taxes as a percentage of GDP was 36.8 percent in Israel, above the OECD average of 32.2 percent. This is different from the tax rates in other countries such as Canada (see website for advice on how to deal with this), and so the claim seems quite sound when you boil it down to these basic statements.

But in fact the picture is more complex. The problem with Israel’s tax system is not its tax brackets but its structure. Income taxes are relatively low, and 47 percent of Israelis actually pay no income tax at all. But indirect taxes-most of which are consumption taxes, and most of which are regressive-make up a much higher proportion of the tax burden than in other Western countries. (One of the most-cited indirect taxes is the huge levy on the purchase of new cars. But since SoJo is a no-car blog, we really don’t care about that one.)

The bottom line is that the poor and the working middle class bear an undue tax burden. One percent may not seem like a lot, but it has a double effect. In a stroke, Bibi is going to raise the price of everything I buy, so that I’ll have to cut my consumption, and raise the cost of my services, so that I’ll have less income.

I should stress that I am not an anti-tax crusader. I want my state to shore up the poor, nurse the ill, support the elderly, and provide me with services, and I know that I have to pay for that. Taxes are fine-but they must be progressive, fair, and sensible.

Is Bibi fleecing the poor because of his ideology or because it was the easiest way to get his budget passed? I’d put money on the latter-if I had any money left.

6 thoughts on “Bibi’s Taxes–Value Subtracted”

  1. Yes, sales taxes are regressive, however, by encouraging saving they help with the balance of trade. Sales taxes, encourage saving. This is because the tax burden is shifted to consumption and away from income. So, the more you save, the more you avoid paying taxes. Consumers may not think of it like this, but ultimately, when things are more expensive they will spend less. As this happens, people will end up buying less imports, since they are buying less of everything. The money that they don’t spend gets directed toward investing via intermediaries (banks). This will improve the balance of trade (surpluss in Israel’s case). Export oriented economies (i.e. Japan and Germany) have high savings rates.

    Israel benefits tremendously from its ability to export. Taxing consumption is a way to keep things this way.

    Finally, consumption taxes are hard to get around, while getting people to pay income taxes can be a challenge.

  2. Chris, it’s not clear that consumption taxes broaden the tax base. Consider a switch from a pure income tax to a pure consumption tax in an economy with just gardeners (who don’t pay income tax) and hairdressers (who do). Gardeners who dodged their income tax would have to pay the VAT when they go to the hairdresser, but on the other hand, hairdressers would no longer pay tax on income they spend on gardeners. Moreover, assuming competitive markets (!), the incidence of the tax wouldn’t change either. The result generalizes to more complicated economies.

    There are other reasons to shift from an income tax to a consumption tax: the former distorts the choice between current consumption and future consumption, while the latter doesn’t. There are also reasons to favor a higher savings rate in the abstract (in the medium-run, it leads to a higher level of capital accumulation, and thus a higher level of growth as the economy approaches a new steady state). But achieving a positive current account balance isn’t one of them—there is no “right” level of net exports. (No doubt countries benefit from their ability to export, but they also benefit from their ability to import—after all, they get the imports!)

    As Haim notes, the above considerations aside, a higher savings rate is generally undesirable during a recession, since it results in a fall in aggregate demand. That’s why both monetary and fiscal policy during downturns is geared toward stimulating consumption.

  3. I should also note that consumption taxes can be designed so as to vary the amount of progressivity. For an example, see the X tax.

  4. I should also note that consumption taxes can be designed so as to vary the amount of progressivity. For an example, see the <a href=”http://www.princeton.edu/~ceps/workingpapers/93bradford.pdf” rel=”nofollow”>X tax</a>.

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