Finance Minister Moshe Kahlon took top treasury officials by surprise last week when he suddenly brought up the idea of cutting taxes as part of the 2017-18 budget.
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He also planned to surprise his boss, Prime Minister Benjamin Netanyahu, but the news leaked out last night despite Kahlon’s instructions to officials to keep the plan under wraps until he was ready to announce it.
With the news out, the finance minister was quick to attach his name to the initiative. “In the next budget, we will reduce taxes by billions of shekels,” he told a meeting of his Kulanu Party faction.
Kahlon told Finance Ministry officials that the government can afford to lower taxes because tax receipts have been running far ahead of projections this years, a trend that treasury economists say is likely to continue for another two years.
In the first six months of this year alone, tax receipts were 4 billion shekels more than projected. Meanwhile, every one-point reduction in the corporate tax rate reduces state revenues by 800 million shekels and every one-point cut in the personal rate about 3.5 billion shekels.
But politics is also a big factor in the plan. Kahlon and his Kulanu Party vaulted to a strong showing in the 2015 elections, giving him control of the powerful finance portfolio, based on a campaign pledge to improve the lot of the poor and middle class.
By keeping the plan secret from Netanyahu, Kahlon aims to ensure that he gets the maximum credit for a measure sure to be popular with voters. Other minsters routinely complain that Netanyahu often shares or assumes credit for their initiatives and Kahlon wants avoid that outcome.
The Kahlon plan focuses on corporate and personal income taxes. It calls for the corporate rate to drop to 23% or 23.5% in 2017 from 25% now. Personal income tax rates would be cut one or two percentage points evenly across all tax thresholds or, alternatively, to focus the reductions on middle incomes of up to 20,000-25,000 shekels ($5,150-$6,430) a month.
On Monday, Kahlon mounted an attack on his critics, which include the treasury budget division.
Recalling his controversial reductions in the value-added and corporate tax last year, he said, “They were subject to attacks and criticism, but the measures have proven themselves. Those who attacked them back then now admit they were wrong. Even with the reductions, we still have excess revenues.”
Tax receipts in the first half of this year were up 6.4% from a year earlier in real terms, to 142.3 billion shekels, and the treasury says the excess collections could reach as much as 10 billion shekels by the end of the year, even at the most conservative estimates.
The treasury is now projecting tax revenues of 290.2 billion in the first year of the planned two-year budget, and 305.2 billion in 2018, figures the finance minister thinks are too conservative. Kahlon has told officials that revenues will be considerably higher, insisting that tax cuts will add to them still more.
Although the Bank of Israel and private-sector economists have been cutting their forecast for Israeli economic growth, the Central Bureau of Statistics recently revised its formula for calculating the value of service exports, which will raise the rate of overall economic growth for 2015 and 2016 to the treasury’s forecast of 2.8% annually.
Reduced personal tax rates should boost consumer spending while lower corporate rates will encourage Israeli companies to step up operations and help exporters cope with the strong shekel.
“There are two main engines that encourage economic growth – investment and lower taxes,” Kahlon said. “Tax money is money that belongs to the public and when there is an excess, our obligation is to return it to the citizens.”
Like Kahlon, the treasury budget division is worried that the excess receipts will be claimed by coalition parties as spoils, but those concerns are counterbalanced by the need to close a budget hole – the gap between spending commitments and rules on deficit and spending growth – that could reach 15 billion shekels in 2017 alone.
Meanwhile, the Bank of Israel takes the view that excess taxes should be used to pay down Israel’s debt.