Is Netanyahu Trying to Snare Lapid in the VAT Trap?

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In the reports about progress in finalizing a state budget, some things were not disclosed.

For example, it was said that Finance Minister Yair Lapid had decided to scrap tax exemptions worth NIS 6 billion, but what those exemptions consisted of was not reported. The media were leaked only the information on what wouldn't be touched. The current value added tax exemption on fruits and vegetables was off limits. So was the VAT-free status of the city of Eilat. The tax exemption on continuing education funds (kranot hishtalmut in Hebrew) wouldn't be repealed either.

So if Lapid intends to generate NIS 6 billion by repealing tax exemptions, and he forgoes the two most major exemptions, just what does he plan to repeal?

The education fund exemption is thought to be worth NIS 3 billion and the VAT exemption on fruits and vegetables between NIS 2 billion and NIS 2.5 billion. The Eilat VAT exemption is worth about NIS 500 million. Passing up those option leaves only the exemption provided in the encouragement of capital investment law (NIS 1 billion-2 billion), betterment taxes on investment housing (NIS 1 billion-2 billion), and maybe rent income (up to a billion shekels), but even all of those combined won't amount to NIS 6 billion.

Lapid can't pull money out of thin air. So it's hard to understand his up-front decision to pass up on repealing the three largest possible tax exemptions. Particularly astounding is opting not to impose VAT on fruits and vegetables, which costs the treasury a bundle. The primary beneficiaries of that exemption are thought to be the major supermarket chains (which increase their profit margins on vegetables) as well as vendors at public markets who don't fully report their incomes to the tax authorities.

So why not scrap it? It's possible that Lapid really believes the exemption helps the poorer segments of the population pay for produce, which would be strange considering the fact that all other food items, including basic staples, are subject to VAT. Another possibility is that Lapid learned the lesson of his predecessor, Yuval Steinitz. In 2009 Steinitz tried to impose VAT on fruits and vegetables, and in the face of public pressure, Prime Minister Benjamin Netanyahu beat a retreat on the measure at the very last minute.

Unlike Lapid, Steinitz was close to Netanyahu. So Lapid likely looked at the fiasco that Netanyahu caused Steinitz and figured that the chances of Netanyahu doing the same to him were even higher.

In fact the thinking is that Netanyahu is out to see Lapid fail, and if Lapid pushes for a repeal on the VAT exemption on fruits and vegetables, it could provide the prime minister just the right trap to snare his finance minister.

If these calculations are at work, it lays bare the full extent of the destructive complexity of the Netanyahu-Lapid relationship. It's no secret that Lapid is eyeing the prime minister's job in the next one or two terms, making it more important for him to be successful in his current post and especially crucial that he not fail. For his part, Netanyahu is well aware of Lapid's aspirations and sees him as a rival who could cost him his job, and therefore is in no way itching for him to succeed.

The two are locked in a complex game of chess, with each weighing the risks and benefits of every new move. Lapid is being careful not to take major risks that would allow him to be tripped up by Netanyahu, while the prime minister is being careful not to help his opponent. The fact that his opponent is a senior member of his cabinet doesn't matter.

The consequence of this destructive chess game could be government paralysis. As in the case with VAT on fruits and vegetables, it might lead Lapid to be wary of playing into Netanyahu's hands and to hesitate to take tough albeit important steps. Instead of making far-reaching structural reforms that would change the country long-term, this third Netanyahu government could become a mediocre one that makes no substantial policy, headed by people who are more preoccupied with their own political survival than the survival of the country.

If that actually happens, it won't be just Finance Minister Lapid who fails in his job, because Netanyahu would be a similar failure, earning the record as the prime minister who has served longer than any other in Israel's history and had the least to show for it. Is that how the prime minister wants to go down in history?

There is only one person who can put an end to this chess game, and that is Netanyahu himself—the more senior, more experienced and more secure of the two. It is Netanyahu who should already be having his eye on his place in history, on reforms that are major and therefore really difficult. Coming to a new status quo with the ultra-Orthodox community is just the first of the historic steps the current government must take to go down as a government that has made a difference.

More important than the status quo with the ultra-Orthodox is a new status quo in the public sector involving reforms in the electric utility sector and the ports and particularly in public sector labor relations that would pave the way to better and more efficient management. Taking on the Histadrut labor federation would be a historic move, not because collective bargaining agreements need to be scrapped altogether but because they need to be changed and adapted to a modern labor market. But such a step would require enlisting the entire government in the task.

If Netanyahu wishes to be remembered as a prime minister who has really made a difference, he has to initiate steps of this kind on his own or encourage his finance minister to do so. Prime ministers are considered great not for curbing their finance ministers but for demonstrating that they are not afraid of them and for viewing the success of a finance minister as the success of the prime minister himself. That's the approach that made Ariel Sharon a great prime minister when Netanyahu was his finance minister and now it's Netanyahu's turn to take the same approach.

The Good Old Days: Lapid and Netanyahu during the previous government.Credit: Emil Salman
Fruits and veggies will not be getting an added serving of taxation anytime soon.Credit: Emil Salman

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