Israel's VAT Increases Inequality, Finance Ministry Report Finds

Value added tax rate is more costly for bottom deciles because they spend a higher percentage of their salaries on immediate needs

Finance Minister Moshe Kahlon reduced VAT by 1% at the beginning of his term in 2015.
Yehuda Ben Itah/Yud Photos

Value-added tax increases inequality within Israeli society, a report by the Finance Ministry’s chief economist concluded.

Israel’s VAT rate is 17%, and is charged on most consumer items and services. The report, published Sunday as part of the chief economists’s weekly summary, found that VAT increases social inequality by 6%.

It compared the effects on the different deciles of Israeli society, and found that the bottom decile spends 29% of its gross salary on VAT, the second decile spends 19%, and the top decile only 6%. The differences stem from the fact that the lower deciles spend a higher percentage of their salary meeting immediate needs. When looking only at consumption-related expenses, the Finance Ministry report found that some 13% of the bottom decile’s budget for consumption went to VAT, compared to 11% of the top decile’s consumption budget.

The chief economist also took a comparative look at other countries, and found that Israel’s VAT increases inequality relative to income more so than in Belgium, Greece, Hungary, Ireland and Great Britain.

Israel’s VAT rate was lowered by 1%, from 18% to 17%, at the beginning of Finance Minister Moshe Kahlon’s term at the end of 2015. Each 1% cut to VAT costs the state 5 billion shekels.