Wanted: Jet Fuel

Bank of Israel governor Stanley Fischer is having his cake and eating it too. He says that in principle he favors lowering taxes, but adds that now is not the time to do so.

In 2003, Benjamin Netanyahu was much more courageous. He was not afraid of lowering taxes despite all the intimidation. The truth is Netanyahu has gotten cold feet. Budget officials have managed to scare him by saying the deficit will be so great he shouldn't even dream of lowering taxes. But since Netanyahu believes that lowering taxes is jet fuel for growth and employment, they reached a compromise. Taxes will be lowered, but only in 2011 - after the crisis has passed.

Was Netanyahu overly scared? This is the story, after all, of which came first, the chicken or the egg. If lowering taxes provides fuel for growth, and if this is done now, precisely at the time of the crisis, it will lead to an impressive increase in activity, more investments and greater consumption. Thus, tax revenue will increase, not decrease, and the threatening deficit will be eliminated.

But the Netanyahu of today is not the Netanyahu of 2003. Back then he was much more courageous. Back then he cut the fat and lowered taxes. The response was a leap forward and a growth period of five years. As a result, tax income grew and the budget deficit decreased. The ratio of public debt to GDP also improved immensely.

But this successful attempt did not make an impression on those who oppose lowering taxes, led by the Bank of Israel. The bank's research department continues to publish misleading figures even today about the tax burden in Israel. It claims that the burden in Israel is smaller than the average in the developed countries. But the system of comparison used by the bank's officials is faulty. If they compared correctly and took into account the size of the countries, it would be clear that Israeli citizens pay more taxes than average. And anyway, what's so good about being average? Perhaps it's worthwhile to collect less tax and thus encourage investments and growth?

Bank of Israel governor Stanley Fischer is having his cake and eating it too. He says that in principle he favors lowering taxes, but adds that now is not the time to do so. In 2003, Fischer also opposed lowering taxes because then, too, it was "not the right time."

The Bank of Israel is always against lowering taxes, no matter what the economic situation. This was also the case in 1986, when Moshe Nissim was finance minister and Michael Bruno was governor. Nissim presented a revolutionary proposal at that time for a tax reform. He was convinced that lowering taxes was the way to encourage investments, employment and productivity. Nissim did not set up a public committee or waste any time. He instructed the income tax division to prepare a plan for lowering income tax, corporate tax and tax on investments, to cancel other levies and to cut employers' payments to national insurance.

On a Friday, two days before the plan was due to be brought before the government, Bruno asked Nissim to postpone presenting the reform to the cabinet, because he opposed it. That day, in a newspaper interview, Bruno expressed concern that the budget deficit would increase. He said it was impossible to defend the lowering of taxes publicly when the government was cutting the budget. He even expressed pessimism about the outcome of the reform.

Nissim was furious. How was it possible that the governor should voice his opposition at the last minute despite receiving the principles of the plan so many days before? So Nissim continued with the plan. He submitted the reforms to the cabinet on Sunday and even organized a majority vote in favor. Bruno spoke out against the plan at the meeting, but it was accepted by a large majority, just as Nissim had arranged, and it went into effect in 1987.

Income tax was lowered from 60 percent to 48 percent ("most of a man's labor remains in his hands"), the tax on companies was lowered from 61 percent to 45 percent, the tax on employers was cut from 7 percent to 4 percent, and taxes on property, vehicles and traveling were abolished. But Bruno was not satisfied with the opposition he had expressed at the cabinet meeting. He sent an additional letter to Nissim, on December 17, 1986, in which he once again vented his opposition and fears about the consequences of the reform.

"It is difficult to defend it," Bruno wrote, and he told the media that the reform had not come from the Bank of Israel. Nevertheless the reform was put into effect, and it boosted the economy. The cost of labor decreased, the supply of work increased, exports increased, tax income grew, and not only was there no budget deficit, a surplus of 1 percent was recorded for two consecutive years - a precedent that has not been surpassed since.

It is true that Britain and the United States are currently planning to raise taxes. These are countries that acted irresponsibly during the years of plenty, became involved in a serious crisis and bankruptcies, and are now spending enormous sums on rescue plans. Israel should do just the opposite - both cut expenditure and lower taxes.

If we do that now, immediately, Israel will become an attractive country for investors from all over the world, as well as Israelis living abroad. Growth will be renewed and the budget deficit will be lessened.

The problem is that we need a courageous prime minister for that to happen. One who is not easily scared.