After the government announced it would start a number of significant processes which would increase competition in the Israeli economy, such as the Open Skies agreement, shrinking the Standards Institution of Israel and reforming vehicle importation, it ought to deal with additional obstacles which are weighing down the economy and raising the cost of living. <\/p>\n\n\n\n
One of the main challenges is opening the local economy to global competition; as of now, the government itself is responsible for a large part of the market\u2019s barriers \u2013 raising the level of prices above the average of other developed economies. Therefore, the solution is changing government policy. Imports taxation and regulation restrict commerce, and are among the primary barriers to the kind of competitive importation that would force the local market to get more efficient. The new government set out on the right path (pun intended), and will expand its work in that direction if it can bring significant change to taxation on imports.<\/p>\n\n\n\n
Of course, there is a small problem: The government is already leaking money through the growing deficit. Lowering taxes will reduce government income and make things worse. Nevertheless, this cannot be used as an excuse to refrain from reforming the tax structure and opening the market to competition. The government must do its part to fight the high prices in Israel, and take care of the leak some other way than milking the taxpayers.<\/p>\n\n\n\n
There are two special taxes on importation in Israel: tariffs and sales tax. In 2012, these taxes secured the state 17.6 billion shekels, close to 8% of its income from taxes. Fifteen billion of this sum is sales tax, and the rest tariffs. The vast majority of the sales taxes are justified on grounds of policy – they are mostly on imported vehicles. The goal of this tax is similar to that of taxing fuel: in a small and dense country, the use of fuel products come at heavy external costs, in the form of air pollution, traffic density and car accidents. These indirect costs are borne by someone, and that is the role of the tax, among others. The high tax is meant to make Israeli drivers to internalize the true cost of their driving and prompt them to limit the use of their cars for what’s important. The sales tax on alcoholic beverages and tobacco is of the same kind: aimed at restricting their usage, since freer use imposes high costs on the general public.<\/p>\n\n\n\n
However, a large number of tariffs and sales taxes are imposed on “luxury items” that are hardly luxuries. Many have long since become staples of the average Israeli household, such as kitchen utensils and electric appliances. While it is hard to obtain accessable data on the income from import taxes on vehicles as opposed to taxes on other items, the latter can be estimated at between one to three billion shekels annually.<\/p>\n\n\n\n
This then, is the proposal to the Ministers of Finance and Economy Lapid and Bennet: Declare the abolition of all import taxes that are not energy, private vehicles, alcoholic beverages and tobacco. As simple as that. These are taxes that cost consumers four to five billion shekels a year. This move doesn’t have to be enacted in one go. The tax reduction can be spread over 3-5 years, so long as there is a commitment to see it through. This will also be an important statement of principle: Israeli consumers (and retailers) must have access to the global market. When there is no justification for special policy, and such justifications are restricted, there will be no import barriers.<\/p>\n\n\n\n
Such a move will not introduce a total free market in Israel or cause an immediate fall in price levels – such an achievement will take years of hard work against cartels and other interested parties – but it will point the way of government policy and build up some trust among the battered and suspicious Israeli consumers.<\/p>\n\n\n\n
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