steinitz - Tomer Appelbaum - August 8 2011
Yuval Steinitz Photo by Tomer Appelbaum
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Even before the Trajtenberg Committee has made a first recommendation on social reform, the treasury is taking action. Finance Minister Yuval Steinitz has commissioned his officials to prepare a comprehensive report on how to pay for reforms - and one such way is apparently to freeze the program lowering corporate tax. Corporate tax might even be raised back from 24% to 25%, say sources at the ministry. Some business leaders have urged the government to do so.

Another possible source for reform is unused budgets at the ministries.

However, Israel must balance between social needs and the danger of the world slipping deeper into economic crisis, which would inevitably impact Israel, too, say the sources. Ministry officials therefore feel changes should focus on three areas, one being changes to the tax system. Another is encouraging parents of toddlers to work (including through a negative income tax mechanism ). The third is to lower the cost of living through lifting quotas and regulatory restrictions.

Steinitz has also said that exporters need support in order to continue serving as a driver of economic growth.

Lowering the corporate tax cut is the baby of Prime Minister Benjamin Netanyahu. Back in 2009 the government resolved to lower corporate tax from 26% to 18% by the year 2016. Manufacturers have suggested that corporate tax, presently 24%, be jacked back up to 25% - while in parallel the government should lower VAT on staples and lower indirect taxes, too.

Netanyahu also proposed lowering the income tax paid by individuals. The treasury under Steinitz is thinking of slowing down the process of income tax reduction. Netanyahu's reform was based on reducing income tax payable by the highest four tax brackets by 5% by the year 2016.

Forget about VAT discount on staples

Whatever the manufacturers may feel about it, Finance Ministry officials are firm that VAT on staples isn't about to drop. The requests for VAT breaks fielded by the ministry encompass some 60 products, from food to life-saving drugs, all medicines, dental care, religious artifacts, car safety accessories, newspapers and children's clothing, to name but a few.

"Lowering VAT on some products will create chaos," said a treasury official. The state would lose tens of billions of shekels in income, and the cost of collection would increase by billions, making it a lose-lose proposition, he said.

In any case, the option of breaking the budget to pay for reform is off the table, Steinitz says. "Suggestions leading to economic collapse should be avoided," he reportedly quipped to his aides. "We're on the Titanic and they're arguing about the refreshments to be served on deck."