Analysis / A Bit of Economics- and a Lot of Politics

Prime Minister Ariel Sharon would gouge out one of his own eyes if he could only gouge out both of Finance Minister Benjamin Netanyahu's. That's how much he cannot stand the man. As the elections approach, the rivalry between the two grows, and every economic plan becomes a political struggle.

This is why Sharon takes such pleasure in annoying Bibi, hassling him, letting him sweat and proving that he is the boss. This is the reason for the reports coming from Sharon's bureau, saying that tax reduction is dangerous because it could get the budget into trouble, increase the deficit and promote inflation.

Later, Sharon changed his tactics. He became the champion of social causes to Netanyahu's "evil economic minister." There is nothing more popular these days than statements voicing concern for the "weaker classes." Thus, last Thursday, at the meeting when the program to reduce taxes was presented, Sharon "demanded" the treasury (a statement to the press to this effect was immediately issued) take steps to help the poor. But the simple truth is that Netanyahu's plan was accepted verbatim, without a single change.

The treasury agreed to increase aid to the elderly and day care centers and to encourage people to find work. But then it transpired that the treasury officials, who knew they would have to "surrender" to the prime minister's demands to get the program approved, had prepared these proposals in advance.

One person who did influence the plan (a little) was Bank of Israel Governor Stanley Fischer, who wanted to ensure the deficit would not increase. He persuaded Netanyahu that the additional 0.5 percent VAT reduction would be conditional and asked to give tax reductions to all public sectors. But that was the plan anyway. The marginal tax for the rich was reduced, the middle classes would enjoy wider tax brackets and the working poor would pay less in National Insurance fees.

Israel has no choice but to lower taxes, as all Western states are doing. Anyone who doesn't join in will have no investments and no growth. Therefore, corporation tax will gradually go down to 25 percent and should be reduced more. On the other hand, capital gains tax is relatively low, and, therefore, will be increased. What's missing is a decision to turn capital gains tax to nominal, as is customary in Western states.

The strange part of the reform pertains to the 0.5 percent VAT reduction. This complicates the calculations and will hardly be any use in encouraging growth and reducing unemployment. NIS 1.2 billion will be deducted from the coffers for almost nothing.

The bottom line is that reducing taxes (NIS 10 billion in five years) is a step in the right direction. It reduces the government's hold on the economy and transfers means to the citizens, who always know better what to do with the money. It encourages activity, investments and employment. Studies prove that a state with low taxes grows faster.