VAT and Income Tax Rates Set to Rise 1%; Corporate Tax to Stay Unchanged

PM imposes media blackout, but TheMarker details two secret meetings held last week between PMO staff and Treasury officials in effort to reach agreement.

Sources say value added tax will rise to 17% in the upcoming 2013 budget, but corporation tax will remain unchanged at 25%. Income tax rates in every tax bracket, meanwhile, look set to increase by 1 percentage point.

Although the Prime Minister's Office and the Finance Ministry have not reached a final decision on the 2013 government budget - which is being put together amid uncertainty over the state of the world economy - the tax policy decisions are expected shortly. Earlier forecasts had predicted a rise in corporate tax. The anticipated 1% VAT rise (from the present 16% ) will apparently be introduced as early as next month or August.

In the not-too-distant past, from 1996 to 2003, the corporate tax rate was as high as 36%, but the thinking now is that raising it could hurt the business sector. An increase of 1% in the rate would net the state NIS 700 million a year.

As it currently stands, no surtax on the incomes of the wealthiest taxpayers is expected, due to opposition from both Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz.

A proposal that the value added tax rate be increased by 2%, to 18%, is no longer under consideration, but even an increase of 1% would result in an additional NIS 4 billion per year to state coffers.

It also appears likely that income tax rates in every tax bracket will be raised by 1 percentage point, yielding an additional NIS 3 billion a year. The increase in the value added tax affects all consumers, while the impact of increased income tax rates is more limited because only half the population pays income tax.

The first of four cabinet sessions on the 2013 budget will apparently not be held before the beginning of July. The final session on the budget itself and the accompanying Economic Arrangements Bill, which contains supplementary legislation to the budget, will be held in mid- or late-August.

In the coming weeks, the Finance Ministry will set state revenue targets for 2013 from taxes. The current thinking is that the target would be set at NIS 221 billion, which is similar to the target for this year after it was revised in light of falling tax receipts. The thinking at the Treasury is that even if this year's target is not met, 2013 will be a better tax year due to the higher rate of growth expected then.

Following a shower of leaks from budget deliberations, Benjamin Netanyahu has instructed the Finance Ministry in no uncertain terms to put a stop to all background briefings and other contact with the media. Nonetheless, TheMarker has learned that, so far, two discussions have been held by the prime minister and PMO director general Harel Locker with representatives from the Finance Minister - Steinitz, budget director Gal Hershkovitz and their staff. The first session took place about a week ago and details were leaked to the press, but a second meeting was convened on Wednesday and has been subject to a total media blackout and is being disclosed here for the first time.

Attendance at the second meeting was limited to a smaller group: Netanyahu, Locker, Steinitz and Hershkovitz, without their assistants. It was followed on Thursday by a secret working meeting between Locker and Hershkovitz. Both of this week's meetings dealt with developing a blueprint of projected state expenditures and revenues.

Steinitz and Hershkovitz, his budget chief, set three priorities for the 2013 budget: increasing economic growth; reducing unemployment; and reducing socioeconomic disparities. Netanyahu and Locker have given their assent to the priorities, but in practice there is a fourth major goal, and that is continuing to narrow the ratio between the country's debt and its gross national product by both boosting output and reducing state debt.

The ratio has improved substantially in recent years as debt has declined and as the economy has grown. It currently stands at 74%, and the Treasury's aim is to lower it to 60%. And this comes at a time when the debt GDP ratios in most of the developed world have worsened substantially. The Finance Ministry staff believes that growth in Israel will have to exceed 3.2% next year if the ratio is to improve.

Over the past decade, Israel's average annual growth was 3.5%. Although there were years with higher growth rates - for example, 4.7% last year, 4.8% in 2010 and 4.0% in 2008 - there were also years such as 2009 when economic growth was a meager 0.8%. For this year, the Treasury is projecting a rate of 3.2%, and for next year, the ministry staff is forecasting a somewhat higher rate of 3.5%. With respect to next year's budget deficit, apparently it will be set at 2.5% to 2.75%, accompanied by a plan to reduce it in subsequent years, to show the world and local markets that the Finance Ministry's stance on the deficit is uncompromising.

On the employment front, the government's plan is to continue to boost the ranks of the workforce. In particular, the Finance Ministry plans on continuing to pursue efforts to increase employment in population groups for which workplace participation has been low - ultra-Orthodox men and Arab women.

The bid to bridge socioeconomic disparities will include greater investment in education, particularly preschools and among younger public school children. It is also expected to include investment in transportation infrastructure to make outlying areas of the country more accessible to places of employment in the center of the country.

Before the budget is approved, Netanyahu will also have to resolve the controversial issue of defense spending, which has not been broached in negotiations between the finance and defense ministries. Steinitz is demanding NIS 2 billion in defense cuts, but treasury sources say that based on past agreements, it is to grow by NIS 3 billion.

Defense Ministry sources say Defense Minister Ehud Barak will demand a NIS 5 billion to NIS 7 billion increase, and it is thought Netanyahu is inclined to take a stance closer to Barak's position.

Netanyahu - Emil Salman - May 3, 2012
Emil Salman