More taxes on the way? The scenario awaiting Israelis after the elections

Over the past fifteen years, the Ministry of Finance has proven to us, generation after generation, that the finger of its officials, and especially those in the Budget Department, is particularly quick on the tax trigger.

Sometimes it is a war. Sometimes a crisis in the capital market. Sometimes an election campaign. The excuse changes, but the conclusion is almost always the same — raising taxes. Either way, when a budgetary difficulty arises, the system's preferred solution is almost always to increase the burden on the public. It seems that in the Treasury, they never miss an opportunity to raise taxes.

In fact, over the last fifty years, the Budget Department has operated in this spirit almost non-stop, except for two exceptional periods when the management of economic policy was taken out of its hands. The first was after the economic stabilization program in 1985, and the second was following the severe economic crisis and the practical bankruptcy that the Israeli government found itself in at the beginning of 2003.

It is no coincidence that the Budget Department opposed the new economic policy that I planned together with Benjamin Netanyahu at that time. That policy was based on a completely opposite concept: tax cuts, streamlining government spending using control mechanisms from the business world, encouraging entrepreneurship, expanding competition, and reducing the government's weight in the economy.

Shortly before Moshe Kahlon took office as Minister of Finance, I warned him that within a few hours of entering his office, grim forecasts of growing deficits would be placed on his desk, along with recommendations to raise taxes. I explained to him that this is not an exceptional event but a regular ritual that repeats itself with almost every new Minister of Finance.

Not because they are bad people. Most of them are talented and dedicated professionals. But because for years, a worldview has crystallized in the Budget Department that almost every budgetary problem is solved by raising taxes or increasing the burden on the public. When money is missing, the hand reaches first into the pockets of consumers, employees, the self-employed, and small business owners.

At the same time, the knights of that same worldview often show great generosity towards strong pressure groups, preferred industries, and large companies that receive tax benefits, exemptions, and various incentives. Sometimes both moves are even presented as part of the same "tax reform": increasing the tax burden on the general public on one hand, and granting benefits to strong players in the economy on the other.

In addition, the Budget Department has become a central player in the political management of the state budget over the years. Since it does not have independent statutory powers like the powers held by the Accountant General, its power relies to a large extent on the backing of the Minister of Finance.

The result is a clear incentive system: the department helps create budgetary flexibility that in turn allows the government to finance agreements and political commitments, and in return receives support in promoting its economic worldview. There is no need for conspiracy theories to understand how the mechanism works; it is enough to understand the structure of forces and incentives within it.

A few hours after the ministerial handover ceremony, Moshe Kahlon called me. "How did you know?" he asked, half-jokingly, half-angrily. "How did you know that even before I sat in the chair, they had already come to me with plans for tax increases?"

I replied that they do it to everyone, and that they did it to Netanyahu and me in 2003 as well. I recommended that he do exactly the opposite. To my delight, he chose not to accept these recommendations as a foregone conclusion. He lowered the VAT instead of raising it, refused to automatically adopt the horror forecasts, and chose to manage an independent economic policy. In my eyes, this was one of the most important decisions he made as Minister of Finance. It allowed him to focus on reducing the cost of living and increasing competition, and helped make him one of the best Ministers of Finance of the last few decades.

And now, according to media reports, a large-scale tax plan is already being concocted in the Treasury for the day after the elections. And what does the plan include? Raising VAT for the general public, raising corporate tax which will especially hurt small and medium-sized businesses, and on the other hand, reducing the purchase tax on vehicles.

Apparently, this is a benefit to the public. In practice, as long as the Israeli automotive market remains centralized, closed, and controlled by large importers who hold competing brands simultaneously, a significant part of the benefit may remain in the importers' pockets instead of reaching the consumers. Experience shows that when competition failures are not addressed, even tax cuts do not necessarily reach the public.

In 1985, Prof. Herbert Stein, who was the main person responsible for formulating the stabilization program, told the Treasury officials that they should continue to do exactly what they had done until then — only in reverse. It seems that four decades later, this advice is still relevant.

The next Minister of Finance should throw the tax increase plans into the trash and choose another path. The Israeli economy does not suffer from a shortage of taxes. It suffers from a high cost of living, excessive housing prices, centralization, strong monopolies, excess regulation, and a government that struggles to become efficient.

Whoever seeks to strengthen the Israeli economy must address these problems. He must expand competition, dismantle centralization, reduce budgetary waste, and reduce the burden on the productive public. Raising taxes is the easiest solution for the government. It is usually also the worst solution for the economy.