Netanyahu Must Buck the Populist Trend and Keep VAT Where It Is

Value-added tax applied identically to every product and service is the most effective tax there is.

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Cheese at a deli prior to Shavuot, Tiberius, May 8, 2013.
Cheese at a deli prior to Shavuot, Tiberius, May 8, 2013.Credit: Guy Eisner

If this nonsense had come from Arye Dery, the leader of ultra-Orthodox party Shas, we could have dealt with it. But when the honorable prime minister supports zero value-added tax on basic goods, that’s a bad sign.

It’s a sign that populism is winning. It’s a sign that even someone who understands economics is fine with causing irreversible damage in order to portray himself as “socially oriented” — even if it means doing something drastically uneconomic and not socially oriented.

If you really want to improve conditions for the bottom one-third, there’s no reason to do away with the VAT that the top two-thirds pays, not to mention that the top two-thirds benefits much more from zero VAT because they buy much more. The Bank of Israel has found that members of the bottom 10 percent will save only 345 shekels ($87) a year if VAT is eliminated, while the top 10 percent will save only 590 shekels.

What’s the point in subsidizing cheese and milk for tycoon Shari Arison when the goal is to help Mrs. Levy in Sderot? Also, zero VAT would take a great deal of money out of the government’s coffers, and since neither Moshe Kahlon nor the prime minister are willing to raise taxes, the only solution is to cut back on education and welfare — and harm the lower classes.

Those who want to help the lower classes need to do it directly by broadening negative-income-tax efforts and benefits for the elderly. They should increase the education budget in the country’s outskirts and invest in public transportation and professional training. Such moves would be much more effective than zero VAT.

Delegations from every European country come to Israel to learn how we’ve been able to keep VAT identical for all products and services (except for fruit and vegetables, tourism services and in the resort city Eilat in the far south). There are a thousand different VAT rates in Europe, which makes for a complex and confusing system. The Europeans would like to turn back the clock and go back to a single rate, but they can’t. Populism is winning there, too.

VAT applied identically to every product and service is the most effective tax there is. It’s easy to collect, doesn’t require much bureaucracy, doesn’t make people less willing to work and doesn’t cause resources to be allocated incorrectly. But VAT at many different rates leads to fraud, manipulation, tax evasion and a flourishing black market — exactly what’s going on now with fruit and vegetables.

What’s easier than selling Camembert to a customer, registering the sale as tax-exempt cream cheese and making 18 percent more profit at the public’s expense? Who’ll be able to check what the bakery does with all the flour it buys? Was it used for making tax-exempt sliced bread or taxed pitas?

Also, a VAT exemption on basic products (which largely means dairy products) will turn the cooperative Tnuva into a bigger and stronger monopoly. A cheese exporter will have to pay VAT while Tnuva will be exempt. That’s how Dery and Benjamin Netanyahu will destroy the competition against Tnuva that’s starting to develop, and the prices of already expensive dairy products will continue to rise. Tnuva will profit and the public will lose.

It should be clear that the cost of abolishing VAT isn’t “just” a million shekels a year, as Shas and the Prime Minister’s Office are saying. It’s much higher. Just after the exemption is passed, good-hearted MKs will push to expand it to lifesaving medicines, heating oil in the winter, water, electricity, textbooks and computers. What, those things are less important than a glass of milk?

The buck stops with Netanyahu. After all, he was against zero VAT on apartments for young couples, so why is he now supporting an idea that’s just as bad? Is there really no limit to populism?

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