Prime Minister Benjamin Netanyahu has put the kibosh on a deal government officials struck just this Monday, that would have held up income tax cuts.

The prime minister views tax cuts as key to his economic world-view. But Finance Minister Yuval Steinitz had struck an agreement with Finance Committee chairman Moshe Gafni to postpone lowering income tax and corporate tax. In return, the planned increase of gasoline tax would be put off.

Legislation on the tax changes had passed the first reading into law in the Knesset. But the legislative process has since stalled. It seems the reason is that Netanyahu demanded that the corporate and income tax cuts - his baby - be made as planned.

Netanyahu brought up the issue yesterday at a press conference on reforms at the Israel Lands Administration, though he wasn't very clear. He and Steinitz indicated that no final decisions had been made on tax cuts, or on raising gasoline tax.

"We'll decide at the end of the year," Netanyahu said.

The prime minister has made the reduction of direct taxes a major priority; he's the one who pushed through the plan to gradually lower corporate tax from 24% to 18%, with the maximum income tax rate falling from 45% to 39% by 2016. The plan calls for corporate and income tax to be lowered by 1% next year, along with a 40-agorot increase in fuel excise tax.

This week, however, Gafni and Steinitz agreed that most of the 2012 tax changes would be deferred by a year. The only change that the two agreed would proceed as planned was a decrease in income tax for lower earners.

The prime minister believes that tax cuts would boost the economy and encourage growth, just as the tax cuts he pushed in 2003 did. His stance runs counter to the position of the Bank of Israel and the Finance Ministry, where it is thought that direct tax (income tax and corporate tax ) is low enough.

In addition, Finance Ministry officials believe that the Israeli tax system suffers from a lack of balance in which direct taxes are among the lowest in the world while indirect taxes are among the highest. So the ministry seeks to increase direct taxes and lower indirect taxes such as the fuel excise tax. The agreement between Steinitz and Gafni was a small step in that direction, but its implementation is now in doubt.

It's not clear if Netanyahu was caught by surprise by the deal or if the prime minister initially gave in to Steinitz's entreaties only to backtrack later. In either case, bewilderment reigns over the matter and the course in the future.

Gafni said the Finance Committee insists its decisions on taxes be implemented as planned in 2012. In other words, tax on gasoline would not be increased (by 40% ) and corporate tax would not be reduced (by 1% ).

Knesset sources suggested that Netanyahu and Steinitz would find it hard politically to increase tax on gasoline, given the public's outrage at the high prices.