Former Economy Minister Arye Dery is not willing to be a sucker. He is insisting that the government honor the coalition agreement signed with his Shas party, promising it an exemption from value added tax on staples. The staples have been replaced by public transportation in the meantime, but the principle remains: zero VAT, at all costs
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The Finance Ministry and the Bank of Israel tried to convince Dery to withdraw his demand and to adopt a different proposal, one that is better and far more suited to the social-welfare goals that the chair of Shas is trying to promote. In the case of public transportation, its an easy proposal. Because the government is interested in encouraging the use of public transportation, its one of the few products that benefits from a subsidy. The treasury would be glad to use the sum promised to Shas in the coalition agreement — 650 million shekels — to increase the subsidy.
Using the money would make it possible to increase the subsidy on all public transportation, and to achieve a discount of about 14 percent in the price of a trip. It would also be happy to focus on granting a special subsidy to public transportation in the countrys peripheral areas only — a very social-welfare oriented proposal — thus achieving discounts of up to 50 percent in transportation prices.
The treasury and the Bank of Israel suggested these two types of discounts to Dery, in place of the exemption from VAT. In terms of mathematics and economics, its exactly the same proposal. The prices of public transportation, either throughout the country or only in the periphery, would be lowered — for the benefit of the weaker populations, who are the main consumers of these services. But they would not cause the damage involved in undermining the principle of uniform VAT on all the goods in the economy.
The reason why it would be damaging is the destructive nature of exemptions from VAT. From the moment there is a decision to institute exemptions, it is very difficult to retreat — and they tend to multiply. And so one of the most effective taxes, VAT, will lose its power. Dery could have achieved all the social-welfare goals he desired, and lowered the prices of public transportation, without undermining the sensitive VAT system. All that was needed was to call the proposal increasing the subsidy, rather than zero VAT.
But the minister refused, due to a preference for appearance over essence, and the prime minister supported him by saying: I dont like it, but agreements must be honored. The same prime minister who surrendered in advance to the dictates of Shas in the coalition negotiations, and is therefore also responsible for the superfluous damage caused by the cancellation of VAT for public transportation.
Dery, who fled from the Economy Ministry in order not to stand in the way of approval of the anti-social gas deal, is trying to be seen as a local Robin Hood by means of empty gestures. Dery is not trying to help the population of the transparent, people whom he claims to represent, he is interested only in enhancing his image at their expense. The zero VAT trick should be rejected.