Kahlon is reportedly considering reducing corporate tax by 1.5 percentage points.
Finance Minister Moshe Kahlon on Wednesday announced that he is strongly considering the possibility of lowering Israel’s 18 percent value-added tax, a move that could stimulate spending in the moderating economy.
“One of the options we considered to generate growth is reducing the VAT. We are seriously examining this issue,” he told a conference of the Israel Lands Authority.
Kahlon is reportedly considering reducing corporate tax by 1.5 percentage points.
Lowering the VAT could bring consumer costs down, though sellers could pocket some of the price difference themselves. Reducing prices, the thinking goes, will spur consumers to buy more, which will boost the economy.
First estimates of GDP growth in the second quarter came to a flimsy annualized 0.3%, far below the roughly 3% growth target that had been estimated for the year.
But lowering VAT would cut into tax revenues at a time when Kahlon is struggling to keep his budget framework together. The 2015/16 budget, which went for its preliminary vote in the Knesset on Wednesday, set the deficit target at 2.9% of GDP.
The Finance Ministry must weigh the trade-off between growth and revenues to decide if the cut is to make fiscal sense. If the cut reduces revenue without sparking much growth, the government might overshoot its target and cover less of its spending.
If the economy grows less quickly than anticipated, however, it would reduce the shekel limit by which the government can overspend, as 2.9% of a smaller economy would be less than the original amount planned.
Given that the wobbly second-quarter figures were largely dragged down by steep declines in exports – declines that only deepened in July – a policy aimed at stimulating domestic consumer spending may not do the trick.
“Reducing VAT 1% won’t aid growth, and such a step could do damage in the medium term,” said Tzach Barkai, Dun and Bradstreet vice president of economics and research.
The problem with Israeli growth, he argued, was from the shaky global economy and low commodity prices, not Israeli domestic demand.
The plan still received plaudits from Manufacturer Association of Israel president Shraga Brosh, however, particularly for easing the tax burden on producers.
“These reductions send a positive message to the business sector in general, and domestic and foreign investors in particular. Reducing taxes is a step in the right direction for improving the business environment,” he said.
If Kahlon ended up compensating for the tax cuts with other indirect taxes to fill the budget hole, Brosh warned, it would undo the positive effects of the original cut.