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The Finance Ministry is looking for an honorable way to back out of its plan to start taxing study funds (kranot hishtalmut), the announcement of which set off general strike alarm bells last week. One possibility being examined is easing income taxes without levying a tax on study funds, and making up for the loss in state tax revenues through economic growth and a slightly smaller than planned reduction in the debt-to-GDP ratio.

Many top treasury officials were opposed to the decision of Finance Minister Roni Bar-On to tax study funds as part of the next tax reform program. The tax reform presented by Bar-On last Wednesday would reduce the maximum marginal income tax rate (including National Insurance Institute and health insurance payments) from 46% in 2009 to 42% in 2015 as well as reducing tax rates for the lower tax brackets.

The reform also reduces corporate tax rates from 27% in 2008 to 20% in 2014 and imposes a tax on employers' deposits to their workers' study funds. The cost of the tax exemption on study funds is estimated at NIS 3.7 billion a year, NIS 2.2 billion of which is for the employers' share in the accounts.

Treasury officials admit that many mistakes were made in planning the reforms, with the failure to coordinate the proposal with the Histadrut labor federation topping the list. Union chairman Ofer Eini responded last week to news of the plan by announcing a general strike starting July 1. Yehudah Talmon, the president of the Lahav umbrella organization for the self-employed, also expressed fierce opposition to the reforms.

The treasury issued the following statement: "The plan presented Wednesday is comprehensive, complete and balanced and is part of the ministry's policy of expanding the tax base, correcting distortions and reducing taxes. We believe in talking with the Histadrut and are confident that after it familiarizes itself with the program it will see that it is good for the economy and that everyone, including those with a study fund, will benefit from it."

Today the cabinet will hold its second meeting on the 2009 state budget, during which the treasury will present its budget targets and the methodology behind them. The finance minister and treasury representatives can expect harsh criticism of their plan to tax study funds and especially of the fact that it was released to the media before it was submitted to the cabinet for approval.