Finance Minister Benjamin Netanyahu has gained an important proponent in the ongoing dispute over economic policy: U.S. Federal Reserve Chairman Alan Greenspan.
The U.S. central banker announced his support of Netanyahu's policies, which say that additional tax revenue should be designated for reducing taxes, and not for reducing the deficit and government debt.
In a meeting last week, Greenspan told Netanyahu: "You should continue the policy of reducing taxes, which indeed creates growth in the domestic product, on the one hand, and amenable conditions for decreasing government debt down the line, on the other." And, indeed, he is correct. Reducing taxes on work encourages people to go out and work.
Reducing corporate tax encourages new investment. Reducing VAT and purchase taxes encourages private consumption - and combined it all leads to growth.
The Bank of Israel research department recruited Governor David Klein to justify its position and published research claiming that the Israeli tax burden (39 percent of gross domestic product) is identical to the existing average of the 30 Organization for Economic Cooperation and Development (OECD) nations. Thus, there is no point in focusing on reducing taxes, rather the focus should be on reducing the substantial debt (106 percent of GDP).
Michael Sarel, head of the Finance Ministry's economic division, was recruited to justify Netanyahu's stance and checked the Bank of Israel's research. He found two breaches: First, the bank did not select the 30 OECD states but rather the 20 richest countries on the planet. Second, the average it utilized was a simple average and not weighted as should be done. When accounting for these two factors, it turns out that the average tax burden of OECD nations is 32.5 percent - much below the Israeli rate.
But that's not all. Tel Aviv University's Dr. Dan Ben-David headed a team studying Israel's central problem: low participation in the work force, and high unemployment. One of the reasons for the lack of desire to work is linked to high taxes. Ben-David says that what is important is the marginal tax and not the average - and every economist knows this much. It turns out that income tax for Israelis is very high for the middle class, one of the highest in the world. When a person is in the sixth decile - in other words, the center of the middle class - his marginal tax is 37 percent higher than the OECD average. In order to demonstrate the weight of the burden, we note that the government receives 65 percent of every shekel the employer pays the employee in the sixth decile, that is a gross income of NIS 11,000 per month. Likewise, our indirect tax burden is 29 percent higher than what is accepted in the European Union, and 142 percent higher than in the U.S.
Thus, in the dispute over the use of excess tax revenue, Netanyahu and Greenspan are right. Income tax, VAT, and purchase taxes should be reduced, on the one hand, and excessive government expenses should be cut. This is the true path toward growth, stability, and unemployment reduction.
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