Netanyahu Pressing to Lower Taxes This Year

Prime Minister Benjamin Netanyahu is pressing the Finance Ministry to come up with a multi-year plan to lower taxes. The ministry's top officials met specially yesterday evening to discuss such a plan to reduce income and corporate taxes over the next few years, and the discussions will continue today.

Netanyahu has given instructions to Finance Minister Yuval Steinitz and his senior staff that he wants the first stage of the tax reduction plan to start immediately after the Knesset passes the two-year 2009-2010 budget this summer. This means the first round of cuts would begin in August or September. The prime minister, who also holds the title of minister for economic strategy, views the tax cut proposal as one of his most important economic steps, as well as a promise he made to voters in the recent elections.

The previous five-year tax reduction plan from 2006 is still underway, with the last stage scheduled for 2010. This plan was formulated when Netanyahu was finance minister under prime minister Ariel Sharon.

The new plan would be a continuation of Netanyahu's original plan, and is also scheduled to take effect over a five-year period. The treasury is expected to reach its conclusions and formulate the plan within two weeks. However, due to the drastic drop in tax revenues this year and also forecast for next year, the tax cuts this year and in 2010 will be small but will grow in future years.

A number of senior treasury officials object to the tax cuts, claiming the present crisis in tax collections does not allow such reductions. The governor of the Bank of Israel, Stanley Fischer, also spoke out a number of times recently against tax cuts this year and next.

Even though treasury officials are trying to convince Netanyahu such reductions would not be appropriate now, it is unlikely Netanyahu will be persuaded. The prime minsiter still wants the first stage to come this year, even if it is only a small cut.

Tax revenues are expected to be NIS 80 billion short of original forecasts used in the 2009 budget, which was passed by Ehud Olmert's cabinet last August, but never passed the Knesset due to the elections.

Details of the plan are still under discussion, and no specifics have been agreed to yet, though a number of issues are clear. The major cuts will start only in 2011, and carry on through 2014. The reductions in individual income tax and corporate taxes will also be coordinated, so as not to create incentives for business owners to manipulate their tax obligations.

Netanyahu's original plan, formulated in 2005 and which took effect staring in 2006, included a drop in individual incomes taxes from a highest rate of 49% in 2006 to 44% in 2010. Corporate taxes were to drop from 32% to 25% over the same period. The new plan wil most likely see these rates falling to 40% and 20%, respectively, in 2014.