Kahlon: Tax Windfall to Go Back to the People

Finance minister’s statement at odds with Bank of Israel governor, his ministry’s chief economist

Moshe Kahlon, Kulanu party leader in Tel Aviv, Wednesday, March 18, 2015

Finance Minister Moshe Kahlon acknowledged publicly for the first time on Wednesday that the 17 billion shekels ($4.8 billion) in tax revenues that Tax Authority has received in excess of projections since the beginning of the year will be used to lower taxes.

“We will find a way to return the money that has accumulated in state coffers to young couples and the middle class. There are too many unnecessary customs duties in Israel, and we are going to deal with that,” the finance minister said.

Speaking at the dedication of the Unipharm pharmaceutical firm’s new plant in Yokne’am, Kahlon added: “Our plan is to responsibly return the money to the public. Our economy is in excellent condition, and I expect that our debt will also be reduced next year. Israel’s debt is low, and when debt is low, it’s possible to invest in citizens. I prefer to reduce the debt by growing the economy and expanding the pie and investing the money back in the economy.”

“High taxes are no guarantee of high revenues,” he said. “You can reduce taxes and bring in more money.” Speaking about the 2019 budget, he said the planned budget reflects “stability and a horizon to the world. There are a lot of large multinational companies on their way to Israel.”

Kahlon’s comments are in contradiction to remarks by Bank of Israel Governor Karnit Flug, who over the past week or so warned several times about using tax surpluses, which are one-time revenues, to lower taxes. “The significance is that, if taxes are reduced, there is a high probability that taxes will have to be raised in 2019,” Flug said. “Such swings in tax rates are undesirable for the business sector.”

The finance minister’s stance is also at variance with that of Yoel Naveh, the chief economist at Kahlon’s ministry, who on Monday warned against earmarking one-time tax surpluses for government expenses.

At the Knesset last week and at Sunday’s cabinet meeting this week, Prime Minister Benjamin Netanyahu said he and Kahlon would soon finalize plans to cut taxes, making it doubtful that there would be opposition at the political level to such a cut. Over the past six months, Kahlon has lowered the purchase tax on cellular devices and customs duties on shoes. Corporate taxes are also due to drop from a rate of 25% at the beginning of Kahlon’s term as finance minister in 2015 to 23% next year.

Every 1% cut in the corporate tax rate involves a direct loss to the treasury of 900 million shekels a year. A 1% cut in the value added tax rate, which is currently 17%, would result in a loss of about 5 billion shekels a year, assuming that economic activity remains unchanged. Similarly a one-shekel cut per liter in the excise tax on gasoline, which generates 13 billion shekels a year in tax revenues, would result in an annual loss of more than 5 billion shekels in tax revenues.