Netanyahu, Finance Minister Plan New Round of Tax Cuts

Treasury sources say the measures will include lower personal and corporate tax rates and a reduction in VAT.

Finance Minister Moshe Kahlon and Prime Minister Benjamin Netanyahu, February 19, 2017.
Olivier Fitoussi

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon said Monday they had agreed to develop a joint plan to lower taxes.

A very brief statement from the Prime Minister’s Office said the two “agreed that following the economic achievements of the State of Israel over the past year, they sought to continue encouraging economic activity and would formulate a joint plan to lower taxes.”

Treasury officials who asked not to be named told TheMarker the plan would consist of cuts in personal and corporate tax rates, as well as lowering the rate of value-added tax. A detailed plan will be drawn up by Eli Groner, the PMO’s director general, and Shai Babad, the Finance Ministry’s director general, and presented within the next few weeks.

Kahlon has pushed hard for tax cuts since taking office nearly two years ago, most recently with a round of personal and corporate tax cuts that went into effect at the start of the year. He said in January he would seek more reductions, but it was believed he would wait to see whether the sharp increase in tax collections that Israel has enjoyed this year continued into March.

But the finance minister was coaxed into moving faster by Netanyahu, who is concerned that early elections may be in the offing and is eyeing the tax windfall that will come from the $15 billion Mobileye sale to Intel (see story on this page).

Ilan Gilon, Meretz’s faction head in the Knesset, ascribed the move to elections. “Netanyahu and Kahlon smell elections in the air, and want to convince the public they are Robin Hood – when in reality they are perpetuating a malicious policy of giving to the rich,” he said.

Kahlon’s determination seems to have been reinforced by a spate of strong economic data. The Central Bureau of Statistics last week revised fourth-quarter gross domestic product growth to an annualized 6.5 percent, while the treasury, also last week, said tax collections in February jumped 8.5 percent from a year earlier.

Tax collections for the first two months of the year reached 51.8 billion shekels ($14.1 billion) – well above forecasts, even though collections early in the year traditionally come in under target. The revenues target for all of 2017 is 293.7 billion shekels, far less than the 310 billion shekels that will be collected if the pace maintains its January-February rate.

However, Bank of Israel Governor Karnit Flug has cautioned against further cuts, urging the government to use its swelling tax coffers to spend more on health, education and welfare, or to pay down debt.

Treasury sources said reductions in personal income tax rates would target middle-income earners, since low earners don’t pay tax at all. The change will be made by adjusting tax brackets to levy lower rates on higher income earners. However, sources said it was not yet clear how big the reductions would be.

VAT would be reduced from 17 percent, where it has been since October 2015, to either 16.5 percent or 16 percent. Every percentage point reduction in VAT costs the treasury 4.8 billion shekels in revenues.

The corporate tax rate was lowered to 24 percent from 25 percent on January 1, and is scheduled to fall to 23 percent next January.

The Netanyahu-Kahlon plan is to move forward the next reduction by several months and lower the rate again in January 2018 to 22 percent.

Speeding up corporate tax reductions is aimed at encouraging Israeli companies and attracting foreign investors, especially when the strong shekel makes exports less price-competitive. Other countries are lowering their corporate tax rates, which gives Israel little choice but to follow suit.