Uncertainty arises over Israel’s further reduction of corporate taxes

Israeli corporate tax is in for a planned deduction in 2018, expected to drop to 23 percent from its already reduced rate of 24 percent in 2017.

This year, tax collection in Israel is at a surplus leading to the question of what to do with the excess money.

There have been media reports saying that Finance Minister Moshe Kahlon will further reduce the corporate tax in a move meant to match the new American reforms announced by the Trump administration.

While there has been criticism in Israel that the deduction of a mere single percent is yet another benefit for those who are already well off, it is unclear that the move will have any significant impact.

Joseph Zeira, an economics professor at the Hebrew University in Jerusalem and president of the Israel Economic association, believes the effect will be minimal.

“This will not have great influence on economic growth. There is very little evidence and proof that such a step does that,” Professor Zeira told Xinhua.

“What leads to growth in Israel is an increase in productivity, technological improvements and investment in education and human capital,” he added.

Just recently, Israel’s Central Bank (BOI) lowered the 2017 GDP growth forecast, while still expecting growth in 2018.

“It is not certain that a 1 percent deduction will lead to significant results,” economist Ori Katz tells Xinhua, “However, a long term plan of reducing corporate taxes will motivate entrepreneurship and attract foreign firms to Israel, especially small and mid-size companies that are not eligible for grants or tax cuts.”

In the short term, the main benefactors of the policy are big, established businesses who are doing well already and do not need the additional reduction in order to prosper.

Two weeks ago, at the beginning of the winter session of Israel’s parliament, the Knesset, Israeli Prime Minister Benjamin Netanyahu said he will act to further reduce taxes and “ease the burden” on Israeli entrepreneurs.

The decision on whether to deduct taxes and what to do with money from tax collection is ultimately a political one.

Social spending in Israel is one of the lowest in the OECD.

Benefits from the deduction in corporate tax will most likely not be felt amongst the less fortunate parts of Israeli society.

“If they decide to deduct tax, this means they have decided on a policy which is less equal. There is a direct connection between tax levels and the level of equality or inequality in a society,” said Professor Zeira.

Inequality and poverty are pervasive in Israel and need to be addressed.

The opinions on whether to deduct corporate tax are divided. Governor of the BOI, Karnit Flug told a recent Israeli cabinet meeting that she objects to further tax cuts and believes social expenditure should be increased on the expense of the gross product. But the Netanyahu government is in favor of the cut.

“Taxes should be reduced,” Katz believes, adding “I do not think that in Israel higher tax rates translate into better services for citizens.”

Israel’s economy has always been vulnerable to its political situation. The constant, imminent threat of a violent flare-up makes investment in the small country a risk.

The reduction of corporate tax has the potential of positively affecting mergers and acquisitions and foreign investments in the country.

Israel lags behind OECD countries in terms of productivity. This may also be a by-product of its political vulnerability.

The minor change in taxation is probably insignificant in the short term, although its opponents believe it is harmful to the Israeli economy by increasing the gap between the rich and the poor.