There are two reasons why the Finance Ministry has halted discussion about further reform of Israel's tax system. One reason is well known, the other isn't.
The known one is the belly-flop of Finance Minister Roni Bar-On's intention to tax study funds. That ended in a humiliating rout. The secret reason is worry over the decline in tax revenues.
When tax receipts are dropping, it's not the time to consider more tax cuts for the middle class and corporate Israel.
The fact is that tax collection started to decline in the middle of last year. The worst drop so far has been in income tax; indirect taxes (VAT and Customs) haven't been affected yet.
To make things clear, Israel does not have a problem with tax collection this year. The treasury projected that it would bring in NIS 190 billion this year, and it's likely to pass that target by a billion shekels or so.
Why is collection falling? GDP grew well in the first two quarters of 2008, didn't it? By 5.6% and 4.2% respectively, in fact - and more people are working, too. So, what's the problem?
The answer is complex. One is the basis for comparison: 2007 had been a boom year. Any comparison will inevitably look feeble. Another reason is that, although the treasury has been cutting taxes, the adage that cutting taxes will stimulate consumption and drive economic growth, thus resulting in more tax revenues - hasn't worked out.
The third reason is that yes, the economy is slowing down. Collection from banks and industry is diving. Now the treasury can only hope that the slowdown doesn't evolve into full-blown recession.
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