Bottom Shekel / Stress Causes Bad Decisions

The tax burden in Israel is among the highest in the world. But the prime minister and the cabinet should have thought of that in advance, before voting on the budget and increasing the excise tax on gasoline. Now, changing the tax will be complicated on several levels.

Prime Minister Benjamin Netanyahu is stressed. And when he gets stressed, he tends to make makes bad decisions.

The Finance Ministry claims the tax on gas is 57%, while the OECD average is 60%. The tax increase that took effect on January 1, of 20 agorot per liter, inflamed the nation, but it also adds NIS 2 billion a year in tax revenue. To abolish that increase without ruining the budget, there are two possibilities. Either NIS 2 billion must be cut from ministerial budgets, including education, health and welfare. Or, else another tax must be increased.

Neither option is trivial. Cutting NIS 2 billion means canceling ministerial plans already in place, at which the ministers would surely balk, especially as they're barely into the second month of a 24-month budget. And if the choice is to raise tax, a question is begged: which one?

Value-added tax could be hiked from 16% to 16.5%, generating NIS 1.8 billion a year, but VAT is a regressive tax and the increase would hurt the poor more than higher tax on gas would.

Alternatively, of course, direct taxes (income or corporate tax ) could be raised. Economists agree that's the more appropriate alternative to a higher gas tax.

But decreasing income tax is Netanyahu's pet project. He isn't about to let it go.

There's also a technical issue. On January 1, the government's computer systems were reset to the new income and corporate tax rates. Setting them again, especially in such as short period of time, is a substantial hassle, and it's costly, too.

Eighteen months ago, a similar situation arose, when at the eleventh hour, Netanyahu reversed his plan to impose VAT on fresh fruit and vegetables.

In the days to come, the Finance Ministry will present various alternatives to the prime minister. But for him to change course again, to cancel another cabinet decision he approved, would hurt his image even more. And it isn't in great shape to begin with.