The Finance Ministry is preparing for the eventuality of having to increase the state budget due to the defense establishment's huge financial demands and the costs involved in rehabilitating northern Israel. It will be necessary to decide how to finance the increased spending through a higher deficit or higher taxes.
It will probably not be possible to raise the deficit far beyond the planned 3 percent target. This makes tax hikes a high probability.
The treasury is working on a "smart" tax hike plan that will abolish tax distortions. Several tax exemptions are likely to be revoked, most of which were created under political pressure. Revoking these exemptions will create NIS 3-4 billion in tax revenues while barely harming the tax system's economic balance.
The key exemptions being targeted are the value of using a company car, VAT on fruit and vegetables, and tax breaks on advanced training funds that are also given to high wage earners (more than NIS 15,000 per month). The treasury has tried for years to revoke these exemptions, arguing the car and training fund exemptions chiefly help the highest decile and the exemption on produce helps merchants and not consumers.
Another key exemption being reviewed is tax breaks for outlying areas, most of which are paid to residents of northern communities. These towns are already slated to get large budgets for rehabilitation, aid that will have more substantial impact than the income tax exemption.
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