The Fruits of Dissent / Why Now?

Prime Minister Benjamin Netanyahu is an avid proponent of value-added tax on fruits and vegetables. But in July 2009 he surprised the entire political system, including his closest cronies, by announcing that despite all of his promises and unequivocal statements, fruits and vegetables would not be subject to VAT. His explanation was that it was his "duty to be mindful of public opinion."

"This is not the right time to levy VAT, and that's my decision," he declared.

The press complained Netanyahu had wavered once again. The finance minister, who was still new at the job, seethed. To the media he said only that his opinion differed from that of the prime minister, and that VAT should finally be levied on fruits and vegetables.

Netanyahu is now considering it once again - this time at a rate of just 1%, compared to the 16.5% proposed last summer. But the economy is no longer in the same terrible shape it was in in July 2009. Tax revenues were at a low point, and pressure on the Finance Ministry to levy VAT on fruits and vegetables was aimed first and foremost at replenishing dwindling state coffers with hundreds of millions of shekels.

Now, seven months later, the economy has undergone an almost complete turnaround. The Tax Authority's income is booming, and this January it took in NIS 1 billion more than forecast. It finished 2009 with a surplus of NIS 4 billion. In fact, the Finance Ministry recently lowered VAT by 0.5%, to 16%, thus relinquishing NIS 2 billion in potential revenue for 2010. The Tax Authority is no longer desperate for the income that VAT on fruits and vegetables would bring.

Netanyahu was correct in saying at the time that there is no reason why fruits and vegetables should be exempt when medicine, food and pretty much everything else is subject to VAT. The question is why Netanyahu has decided, out of the blue, to correct the mistake that he made in July, and whether this time he plans to be "mindful of public opinion." It's unclear whether he will stand by his word this time, and stand up to Mahane Yehuda's vendors in Jerusalem, Talpiot Market vendors in Haifa, Shas members and MKs from his own party - such as Miri Regev - or whether he will once again beat a retreat at the critical moment. The chances that Netanyahu of 2010 is not Netanyahu of 2009, and that this time he will stand up to the pressure, are slim.

Netanyahu is also expected to face difficulties in implementing the proposal. The justification that levying VAT on fruits and vegetables will prevent tax evasion is certainly not likely to persuade the greengrocer-cum-plumbers. It's a well-known secret, certainly to produce vendors, that once a sacred cow is slain, the door is wide open, and VAT of 1% will be followed by VAT of 16%.

Then there's the Tax Authority's ideological objection to two different tax rates. Today it's fruits and vegetables, they say, tomorrow it will be medicine, followed by bread and milk the day after. Plus, there's the Tax Authority's practical objection to the need to adjust the entire tax reporting system to suit two different sets of figures.