Cut Taxes Now

The great U.S. air traffic controllers strike took place in 1981. Controllers struck from coast to coast and shut down air travel. Ronald Reagan, the new president, saw this as his great opportunity - and fired all the striking controllers in one fell swoop.

Everyone was shocked, but from then on everyone took Reagan seriously. Not just another actor from Hollywood, but a leader. Commentators later said the move was also Reagan's most important step in foreign policy, because the Soviet Union, the evil empire, started taking him seriously.

Benjamin Netanyahu now faces a similar opportunity. True, everyone is trying to scare him. The Finance Ministry's budgets division is telling him about the huge drop in tax revenues, which may continue through next year. The governor of the Bank of Israel, Stanley Fischer, is advising Netanyahu not to lower tax rates and not to increase spending. But Netanyahu must remember the arguments that arose six years ago when the finance minister presented his economic plan.

The economy then was also in a deep recession and crisis. There was also a large budget deficit. But Netanyahu decided to cut the budget and lower taxes. Heavy opposition arose immediately. Fischer was against. He, too, was worried about increasing the deficit and national debt. The Bank of Israel's Research Department prophesized gloom back then, too. The Labor Party's Amir Peretz and Meretz's Haim Oron recommended an exact opposite approach: increase spending and raise taxes. Experts from the International Monetary Fund said Netanyahu was about to make a mistake, and most of the media agreed - though not all.

But the finance minister did not flinch. He lowered spending and taxes. The cuts provided rich fuel for growth and the economy took off. Tax revenues climbed and the budget deficit shrank.

The ratio of gross domestic product to debt also improved, but the Bank of Israel's Research Department has not learned the lesson. They have a clear ideology, they always and unconditionally object to tax cuts and even use deceptive statistics to prove their case. They claim that the tax burden in Israel is below average for OECD countries, so there is no room for reductions.

This is simply not true. The Research Department is using a simple average of the tax burden in small countries such as the Netherlands, Norway and Sweden and tallying it with the burden in big countries such as the United States and Japan. But to do the math correctly you have to take a weighted average that accounts for each country's population. Then it turns out that the average tax burden in the OECD is lower than in Israel.

But why make do with the average? Does Israel need to copy other countries' mistakes? After all, research shows that countries with low tax rates grow more quickly and for longer periods. So why aspire to be average?

The central bank's Research Department - just like the entire bank - is living off the public purse. They have no understanding of how much the government - and the bank - need to become more efficient, reduce manpower and improve service, just as the private sector does. And they don't dare talk about cutting public-sector wages because they fear criticism of their own excessive salaries.

One day they will understand that it's always preferable to stimulate the economy by reducing taxes and not by increasing spending. It's better for the money to go to people's pockets and not fall prey to a few ministers' political decisions.

The people will always know better what to do with the money. They will stimulate the economy more and much more efficiently. I have more faith in Israel's 7 million citizens than in the 30 ministers, even with all their aides and advisers.

That's why the great crisis is also an opportunity for Netanyahu to do the right thing: cut spending and cut taxes. Corporate tax should be reduced to 20 percent and the highest income tax to 40 percent, in a gradual process over four years. This will make Israel attractive and draw many new investors and immigrants. This is how we will return to rapid economic growth.

Netanyahu must not be afraid. He must buck the trend, against the recommendations and pressures. He must shock everyone, just as Reagan did a generation ago.