Steinitz, left, and Netanyahu
Steinitz, left, and Netanyahu. Higher income taxes will help pay for lower gasoline taxes. Photo by Alon Ron
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The cabinet yesterday unanimously approved freezing some income tax cuts planned for 2012. The canceled tax breaks were to have gone to taxpayers in the three highest tax brackets, Those in the lowest brackets will still receive their planned reductions.

The cabinet also voted by a large majority to cut the state budget by NIS 300 million over this year and next. The money will come from an across the board cut for all government ministries, except for the defense, education and social affairs departments.

The money saved is supposed to be used for increasing subsidies for public transportation over the next two years. Nineteen ministers voted in favor of the cuts and seven voted against: all five ministers from Yisrael Beiteinu and two from Likud, Silvan Shalom and Limor Livnat.

During the discussion, Prime Minister Benjamin Netanyahu made reference to his intention to raise the defense budget significantly in the near future, pointing to Israel's location "in a region where Iran is attempting to take advantage of the situation and expand its influence by sailing two warships through the Suez Canal."

Netanyahu said he has repeatedly stated that Israel's defense needs will grow and the defense budget will have to grow appropriately.

Defense Ministry sources said Netanyahu promised Defense Minister Ehud Barak last August that his ministry's budget would be NIS 5 billion higher than the budget approved by the cabinet and the Knesset.

The freeze in the planned income tax cuts is meant to pay for a promised rescindment of a NIS 23 agorot rise in the fuel tax. This will cost the state budget about NIS 660 million in 2011 and NIS 760 in 2012. The tax cut freeze will only increase revenues by some NIS 800 million over the two year period.

To make up the difference, a number of possibilities are under consideration, including canceling the corporate tax cuts scheduled for 2012, which would save the treasury NIS 700 million a year.

The cabinet decided to leave the question open until the end of this year, in hopes of finding alternative solutions.

Netanyahu and Finance Minister Yuval Steinitz's plan calls for a reduction in the highest marginal tax rates from 45% to 39% by 2016, and the corporate tax was supposed to drop gradually from 24% this year to 18% in 2016.

Netanyahu views the freeze as a temporary measure for a year or two until the income tax and corporate tax rates continue their downward trend.