Israeli Cabinet Approves Plan to Boost Economy with More Taxes

Israel’s Cabinet, after a 10-hour special session Thursday, unanimously approved Finance Minister Yitzhak Moda’i’s far-reaching economic program aimed at creating jobs for Soviet Jews pouring into the country and ending the economic stagnation of the last three years.

Moda’i’s program would increase the tax burden on ordinary Israelis, but the net effect would be to stimulate local investments and exports to help generate at least 500,000 new jobs for up to a million immigrants expected in the next five years.

Though the plan has the Cabinet’s support, it faces a stiff battle in the Knesset and powerful resistance from Histadrut, Israel’s trade union federation. Its chief, Yisrael Kessar, made clear Thursday he would not accept a plan that reduced the living standard of the average worker.

Although Moda’i’s ideas were known in general outline, there were some sharp surprises at the Cabinet session.

One was his proposal for a capital gains tax on companies and individuals. The Treasury eased the shock by explaining that the levy would be imposed only on new saving plans, not existing ones. Taxes will also be imposed on lotteries and on the sale of luxury flats of more than $300,000.

Also unexpected was the plan to impose a 16 percent value added tax (VAT) on services provided for tourists, and on fruits and vegetables sold at market stalls.

It triggered fierce opposition from Tourism Minister Gideon Patt and Agriculture Minister Rafael Eitan.

Israeli companies have paid for capital gains on their shares since 1982, though loopholes in the law allowed many profitable transactions to escape taxation. Those loopholes would be abolished under Moda’i’s scheme.

TOURISM INDUSTRY HIT HARD

Individual benefits from pension and savings funds have never been taxed. Under the new plan, future profits from such sources would be taxed at a flat rate of 20 percent per annum.

But the capital gains tax would not be applied to profits derived from shares purchased on the stock market.

According to economic observers, the government wants to encourage citizens to invest their spare cash in stocks, so that Israeli industries can accumulate more capital and presumably create more jobs.

The proposal to charge tourists a 16 percent VAT aroused a storm of protest form that industry, which has suffered a serious decline as a result of the intifada and more recently the Persian Gulf crisis.

Tour and hotel bookings have been canceled wholesale this month and some tour companies and hotels have begun to lay off staff.

Tourism Minister Patt reportedly warned at the Cabinet meeting that once lost, those vacationers would not quickly return to Israel.

Opposition to the VAT on fruit and vegetables was led by Eitan who warned it would inevitably encourage a black market in produce.

The measure was referred to a ministerial committee for a final decision. If the committee does not approve the tax, it will have to propose alternative sources of revenue.

Moda’i’s plan dovetails with new measures proposed by Commerce Minister Moshe Nissim to simplify investment regulations and offer higher government guarantees to overseas investors.

But Israeli wage-earners stand to suffer, and not only because the price of cigarettes will rise by 16 percent and beer by 14 percent.

With unemployment hovering between 9 percent and 10 percent and threatening to go higher as thousands of immigrants enter the job market, the government plans to put more people to work by tinkering with the minimum wage.

Under the new plan, it will not apply to new workers in their first six months of employment.

Unemployment insurance benefits will be reduced to create incentives to take whatever jobs are offered, however menial.

Meanwhile, the Finance Ministry and the Bank of Israel engineered a modest devaluation of the shekel this week to help the export industry. Hopefully, those measures will facilitate jobs for tens of thousands of olim.

With aliyah projections steadily revised upward, the government is desperate to provide jobs to ward off the danger of social unrest.

But the new plan leaves open the questions of where it will get the billions of shekels needed to absorb massive aliyah, how it intends to compensate wage-earners for price hikes and how to prevent runaway inflation.

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