A source close to the matter told Globes that Prime Minister Benjamin Netanyahu and his economic adviser, Professor Avi Simhon, are pushing to cancel the VAT hike from 17% to 18%, which is scheduled to go into effect on January 1, 2025. The plan, prepared by Simhon, head of the National Economic Council and supported by Netanyahu, proposes using the proceeds from the plan to provide additional tax benefits on the distribution of retained earnings, which he is promoting, in order to cancel the VAT hike, which was already approved as part of the state budget passed last March.
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A 1% increase in VAT is expected to increase state revenues by more than NIS 7 billion annually. At the same time, the Finance Ministry estimates the direct revenues from the release of retained earnings at NIS 5-10 billion, while Simhon estimates it at NIS 20 billion. Even with the lower estimates, the taxes could replace the expected revenues from VAT in 2025.
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The VAT hike is the Finance Ministry’s main plan in the revised war budget to compensate for the increase in defense spending. Credit rating agencies have welcomed the increase as a factor against further downgrades, so backtracking on this issue could have problematic implications for Israel.
The latest proposal reflects Simhon’s return to a dominant position in shaping the government’s economic policy. After a period of relative silence in the previous budget, Simhon is now behind a number of major moves aimed at providing tax relief to the public. These include incentivizing the release of trapped corporate profits at a reduced tax rate, canceling the VAT increase, and allowing the public to withdraw money from advanced study funds (Keren Hashtalmut) with reduced penalties.
Finance Ministry sources believe that Simhon’s growing involvement stems from increasing pressure from Netanyahu to find new sources of income to avoid additional tax increases.
This article was published in Globes, Israeli Business News – en.globes.co.il – on July 14, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
