Treasury at Odds With MK Gafni Over Allocating Tax Increases

The director general of the Finance Ministry says the middle class could absorb the cost of the higher taxes the treasury is planning.

A battle broke out in the Knesset Finance Committee on Sunday over who should carry the burden of higher taxes as the government moves to close a yawning budget deficit.

Doron Cohen, the director general of the Finance Ministry, insisted that that the middle class could absorb the cost of the higher taxes the treasury is planning, but said companies would respond to any tougher tax bill by slowing investment and hiring.

"No doubt it is difficult for everyone, but the tax burden for the middle class isn't heavy," Cohen told the committee. "A tax increase of NIS 30 a month for someone earning NIS 21,000 is not high. But if we raise the corporate income tax rate, it will hurt [economic] growth and could create a situation where people are not employed."

Moshe Gafni (United Torah Judaism ), the Finance Committee chairman, said the issue was not just about how much money taxpayers were being asked to pay, but how they felt about doing it. Israel's corporate tax rate is low compared to other countries belonging to the Organization of Economic Cooperation and Development, he noted.

"In truth this is about a few shekels, but what we're really talking about ultimately is public opinion," he said, vowing not to let the treasury's plan pass through his committee without changes. "The average tax rate among OECD countries is 25.5%. Let's just raise the corporate tax rate by half a point."

The two sides are sparring over how to pay the bill as tax revenues are not growing fast enough to meet government expenses as economic growth slows. The government has to raise taxes and cut spending enough to keep the deficit from exceeding 3.4% of the gross domestic product this year and 3% next year.

The Finance Ministry rejected a proposal by Gafni to raise instead the income tax rate for people earning more than NIS 14,700 a month by one percentage point to 22%, and the corporate income tax rate by a half point to one point.

Gafni refused to back down and together with Haim Katz (Likud ), the chairman of the Knesset Labor, Welfare and Health Committee, was due to meet with Harel Locker, the director general of Prime Minister Benjamin Netanyahu's office, last night.

Cohen sought the finance committee's approval for the treasury's plan to raise the tax rate one percentage point among those earning above NIS 8,881 a month. He said Gafni's counter-proposal to increase taxes in the higher income brackets would cost the treasury NIS 540 million a year - a loss it cannot afford at a time when it is trying to close a massive gap between spending and revenues.

"Someone earning NIS 40,000 a month will pay a few hundred shekels more [in tax] and someone earning NIS 80,000 will pay NIS 1,000 more," Cohen said. "That will generate some NIS 1.2 billion for the state budget. But the pain incurred among those earning a low income is small. There's no other country in the world where most of the lowest income thresholds pay almost no income tax."

In defense of avoiding an increased burden on corporate tax payers, Cohen cited the global economic slowdown.

"We can't raise the corporate tax," he said. "Banks, insurance companies, cell phone companies, big retailers - all re seeing their profitability decline. I doubt whether these companies handle a rise in taxes."

Doron Arbeli, the head of the Israel Tax Authority, warned Gafni that his proposal to raise corporate taxes would increase uncertainty and worry in the business sector, especially after corporate taxes were raised at the recommendation of the Trajtenberg Committee last January.

Ofer Manirav, president of the Israel Association of Accountants, weighed in with the view that a one-point rise in corporate taxes would do nothing to solve Israel's socioeconomic problems but could lead to higher unemployment.

"If we raise taxes, it will encourage companies to go abroad and we'll collect less tax," he said. "There are alternatives [to raising the corporate income tax] - for example, a temporary order that will enable foreign-registered companies owned by Israelis to withdraw dividends to pay a reduced tax rate of 5% or 10% instead of 30%."

He estimated such a measure would not only encourage Israeli to repatriate some NIS 100 billion capital and earn the state come NIS 10 billion in tax revenue. That capital, Manirav added, would likely be put to use investment and job creation, in turn generating new tax revenues from profits.

Meanwhile, the legislation aimed at raising tax revenues will not include the reform in the law regarding taxes on foreign companies with undistributed profits. The Finance Ministry said on Sunday that it was delaying the final version of the controversial law until next moth.

Earlier on Sunday Labor Party leader Shelly Yacimovich had urged the ministerial legislation committee to vote against the treasury proposal.

"Netanyahu's program to give away gifts worth billions to the richest companies instead of collecting taxes from them hurts the economy," she said. "It erases retroactively debt the companies are obligated to pay by law."