OECD Praises Israel’s Value-added Tax Regime

Report comes days after Netanyahu suggests changing the system by exempting basic food.

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Reducing VAT on food is a slippery slope.
Reducing VAT on food is a slippery slope.Credit: Ofer Vaknin
Meirav Arlosoroff

The Organization for Economic Cooperation and Development, the Paris-based club of the world’s richest countries, on Wednesday praised the existing value-added tax collection system in Israel because it imposes the levy so uniformly.

The organization said that even though Israel’s 18% VAT rate is relatively low – the average for OECD members in 19% – the system for collecting it is far more efficient than in other member countries, which have variable rates and products and services that are exempted.

The report came days after Prime Minister Benjamin Netanyahu proposed eliminating VAT on basic food items, a move he said would help low-income families. If approved, however, it would broaden exemptions, which today are granted only on fresh produce and sales made in the southern resort town of Eilat.

Moreover, the OECD said that lower VAT rates do not always benefit the poor, urging governments instead to consider means-tested and other direct benefits to boost income equality. The report came after a separate OECD study this week said that rising income inequality was hurting economic growth.

The OECD found that reduced VAT rates on certain goods and services disproportionately benefit the rich when the impact is measured as a proportion of household spending rather than the often used benchmark of household income.

“Many governments have sought to protect the poor by giving reduced rates,” said David Bradbury, head of the Tax Policy and Statistics Division at the OECD’s tax center. “But through reduced rates in this area, you are delivering a cash hand-out to the wealthiest.”

Separately, the OECD estimated the average tax burden in its member countries rose to 34.1% of GDP in 2013, up 0.4% on the year. About half the gain came from rising revenue from personal and corporate income tax.

In Israel, the OECD said, the tax burden is far below the average for member countries. The Israeli burden was 30.5% of GDP last year, putting it in the bottom third, but it rose 0.9 point from 2012, more than double the OECD average rise.

The reason, said the report, is that Israel’s direct taxes, mainly income and property tax, is very low. That is due to a long-standing policy of helping the middle class by setting low tax rates and wide tax brackets. Also, social security payments to the National Insurance Institute are low by OECD standards.

By comparison, capital gains taxes are high, as are indirect taxes, like VAT.

The average OECD tax burden in 2013 was slightly lower than at its peak in 2000 of 34.3%, the report said. It declined in 2001-2004, turned upward in the next three years and then started coming down with the onset of the global economic crisis in 2008. Israel’s tax burden also peaked in 2000 at 35.6%, and thus has fallen more sharply than the OECD average.

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