Sunday, June 18, 2006

Israel Fights Poverty The Right Way-By Cutting Taxes

Although most Israelis unfortunately did not vote for the alternative with the wisest economic policy-Binyamin Netanyahu's Likud-, it appears as though Israeli economic policy is still moving in the right direction as Finance Minister Avraham Hirchson have now announced plans to cut the value added tax (VAT)-in sharp contrast to Germany's foolish move to raise the VAT.

Not only will this be a demand side boost, but it will more importantly reduce the disincentive for domestic division of labor through a more advanced service sector. All taxes on economic transactions, whether it be VAT, income taxes or payroll taxes function as tariffs on domestic division of labor, and cutting them will for that reason help boost the domestic economy just as cutting tariffs on international trade will help boost international trade.

Of course, this will not be enough to significantly reduce Israel's income gap versus North America or Western Europe, as the fundamental problem for Israel's economy, that so many of its citizens -particularly its Arab and ultra-Orthodox Jewish citizens- wholly or partially lives of the welfare state. But still, it will certainly help and barring a dramatic increase in Palestinian terrorism or a dramatic downturn in the global high tech sector, Israel will helped by this tax cut likely continue to have higher growth than Western Europe and America for the coming years.


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