Analysis

Trump's Tax Overhaul May Force Israel to Follow Suit

Finance Minister Kahlon would prefer helping the middle class, but the Trump corporate tax cut may force to him act otherwise

Finance Minister Moshe Kahlon.
Emil Salman

Finance Minister Moshe Kahlon is a skilled and sophisticated politician, but when it comes to anything connected with economic policy he adheres to a simple principle: How much money can we give back to the public?

He discovered the magic of lowering the cost of living five years ago when he was communications minister and ordered reforms of the cellular market that lowered rates by the tens of percent and made it easier for new companies to compete.

Since then he has tried to repeat his earlier success. There was the Family Net program, which reduced duties and purchase taxes on baby clothing, shoes and cellphones and subsidized afternoon programs for children. Then there was Machir LMishtaken, in which the government effectively subsidized land costs to bring down housing prices.

Now there is Mondays Net Reductions program to eliminate customs and purchase taxes on a wide variety of consumer products – some 800 million shekels ($227 million) in potential savings for ordinary Israelis.

You can hardly say an unkind word about a finance minister who wants to lower duties and the purchase tax on electronics, apparel, lighting fixtures and bring down the cost of living in the process. But there are a couple of points everyone should be paying attention to before they sing his praises.

1. The savings from eliminating customs and purchase taxes is supposed to be passed on to the consumer, but they are likely to get stopped along the way in the pockets of importers, The treasurys solution is to frame them as an emergency order for one year. If at the end of the year, the consumer isnt seeing lower prices, the orders will be rescinded. That should be a warning to importers who are thinking of exploiting the situation. Officials had thought about lowering duties on air conditioners but didnt because the market is concentrated and the risk that the savings wouldnt be passed on were too big.

2. Kahlon has worked hand to create the image of a finance minister who thinks about the cost of living for ordinary Israelis. There are a lot of ways to accomplish this and playing with the purchase tax is among the easiest. There are harder ways to do it, too, like undertaking reforms, making the public sector more efficient, reducing red tape and regulation and investing in innovation and productivity. But that involves battling vested interests and Kahlon doesnt want to fight them.

3. Lowering customs is supposed to boost the economy by boosting consumer spending. But economists think the better way to foster economic growth is via exports and investment. The Israeli economy doesnt have a consumer-spending problem; the figure has grown sharply in recent years thanks to low unemployment and interest rates.

4. There has been no shortage of talk about Kahlons problem of excess government revenues in the last few months and what to do with them. Most of the discussion is moot: The excess will go to paying down government debt and only a small part will be given back to the public. Net Reduction was just the first installment, The next, more complicated one is how Israel should respond to the planned cut in the U.S. corporate tax to 20% from 35%. Kahlon would prefer tax cuts for the middle class and small business, but Trump is upsetting his plans by forcing Israel to match the U.S. A tax cut for big companies will dwarf everything Kahlon did today.