Finance Minister Moshe Kahlon Weighs Lowering VAT Rate to 17%

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Finance Minister Moshe Kahlon, left, and Prime Minister Benjamin Netanyahu.
Finance Minister Moshe Kahlon, left, and Prime Minister Benjamin Netanyahu. Credit: Reuters

Finance Minister Moshe Kahlon is considering lowering the country’s value-added tax rate from 18% to 17% and lowering the corporate tax rate from 26.5% to 25% in the near future, in light of the tax surplus for the period between January and July of this year, along with the very large surplus that the Finance Ministry will report for August. The August figure has not yet been officially disclosed.

The cut is an effort to get the country back on a sustainable path of growth after recent signs that the economy has begun sputtering. Kahlon is ruling out recommendations by senior staff at his ministry that the budget deficit ceiling for this year and next be lowered instead. Kahlon prefers that the deficit ceiling of 3% of the country’s gross domestic product be left in place for this year and next. The government had initially set a 2.5% deficit for this year and 2% for 2016.

Kahlon met twice on Wednesday with Prime Minister Benjamin Netanyahu and presented his plans to the premier. In light of the most recent economic figures from the Central Bureau of Statistics, which point to a slowing of the pace of economic growth and even concern over a future recession, Kahlon told Netanyahu that he had developed a series of major steps to change the country’s economic course. The lowering of tax rates is included in the plan in the hope that such a move would provide a growth engine for the economy and help maintain the current high levels of employment and low jobless rate.

At Wednesday’s second meeting, also attended by the Finance Ministry’s accountant general, Michal Abadi-Boiangiu, Tax Authority director Amir Levi, the ministry’s chief economist, Yoel Naveh, and Eli Groner, the director general of the Prime Minister’s Office, Netanyahu was said to have asked if the increase in the tax receipts so far this year is a long-term trend or a one-time event. The prime minister is said to have also asked what contingency plans the ministry has in mind if the proposed steps don’t bring about the expected economic growth.

It is easy to lower taxes, Netanyahu said, but a lot harder to restore them to their prior levels if it was found to be a mistake. The prime minister and finance minister were due to have another meeting last night.

The current 18% VAT rate is the highest it has been. It was reduced from 16.5% to 16% in 2010, increased to 17% in September 2012 and then raised to 18% just nine months later. At that time, then-finance minister Yuval Steinitz suggested that when the state’s coffers improved, the VAT rate of 17% would be reinstated.

Regarding corporate taxes, the tax rate was lowered to 25% in 2010 then to 24% in 2011. It was hiked back up to 25% in 2012 and then to 26.5% last year when government coffers were strapped for cash.

Speaking at an Israel Lands Authority conference at Tel Aviv University Wednesday, Kahlon said after receiving data from the Central Bureau of Statistics about two weeks ago showing that the pace of economic growth was slowing, a meeting was convened at his ministry to discuss how to respond to the situation. “One of the approaches that we looked at to spur growth was lowering the VAT rate,” he said. “We are seriously considering the issue.”

Noting that the ministry has billions in surplus taxes, a situation in which the government takes in more in taxes than it is spending, he added: “This is the money of members of the public so it needs to be returned to them.” Acknowledging that the tax surpluses don’t square with statistics bureau economic data, he said he had high regard for the agency’s work but would not dissect its numbers. The Central Bureau of Statistics reported that the economy grew at an annualized rate of just 0.3% in the second quarter of the year, which followed an annualized first quarter growth figure of just 2%.

When Stanley Fischer, now vice chairman of the U.S. Federal Reserve Bank, was governor of the Bank of Israel, he applied pressure on Netanyahu and was successful in directing tax surpluses to paying down the country’s government debt. Now, however, Netanyahu and Kahlon and some other senior Finance Ministry officials apparently prefer returning the surpluses to members of the public and the country’s corporations in the form of lower tax rates in the expectation that this will increase consumption and spur the economy forward.

There are concerns among some officials at the Finance Ministry that ultimately Netanyahu will boost the defense budget beyond what was approved by the cabinet and beyond what was recommended by the Locker committee, the official panel that developed proposals on future military spending. The fear among Finance Ministry staff is that additional funding for the defense budget might eat up much of the current surplus.

Based on the Tax Authority’s receipts between January and August, the new conservative assessment at the Finance Ministry is that for the year as a whole the government will have a surplus of 10 billion shekels (about $2.5 billion) beyond what it projected.

With reporting by Ora Coren.

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