Prime Minister Benjamin Netanyahu considered reducing company tax rates, but was persuaded that lowering VAT was the more progressive step, giving direct support to lower socioeconomic groups.
The step represents a cooperative effort between the prime minister and the finance minister, who said such a move would send a crucial message on Israel's economic recovery.
The move was handled by the director general of the Prime Minister's Office, Eyal Gabbai, and the treasury's budgets director, Udi Nissan. They were persuaded that Israel's economic recovery was sufficient to forgo revenues from 0.5% of Value Added Tax, estimated at NIS 1.8 billion.
The very act, they believe, will offer a positive message on the economy's recovery, thereby contributing to accelerated growth. To be on the safe side, it was decided to cut VAT by just 0.5% for the meanwhile and then another 0.5% at the end of 2010 to avoid excessive loss of revenue of NIS 3.6 billion.
The Finance Ministry and PMO faced a dilemma; which tax cut was preferable - a direct tax like company tax or an indirect tax like VAT? Netanyahu initially leaned toward lowering company taxes, but was persuaded in favor of VAT.
The economy's recovery in recent months is not yet believed to have filtered down to weaker sectors, and reducing VAT was seen as a means to deliver the fruits of economic recovery to them.
The move is also seen as easing inflationary pressures and thus bolstering the Bank of Israel's monetary policy by reducing pressure on the central bank to increase the interest rate and prevent unnecessary strengthening of the shekel, which would hurt exporters.
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