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Reduced VAT on food products? Depends on who you ask

Like migratory birds or new variants of Corona - every few months, when the exceptional cost of living in Israel rises above our happiness, someone offers differential VAT. On the face of it, reduced VAT on food products may benefit the Israeli consumer, but if it's all good So - why are there also opponents?

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• VAT

• Cost of living

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Sonia Gorodisky

Sunday, 05 December 2021, 14:25 Updated: 14:53

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Last week, Tel Aviv came in first and questionable place in the Economist's cost of living index. This provoked a media storm, and rightly so, since it is not just Tel Aviv but a horizontal problem, which has not been properly addressed for years by the government.

The "win" in Tel Aviv's first place should be a wake-up call for the change government, which does not ignore the issue of the cost of living, but the solutions it offers are spread over several years - and it is doubtful how effective they will be until their full implementation.

One of the reasons for the high cost of living in Israel is high food prices. The food sector is a significant component of the annual expenditure of the average household - about 18% of it is directed to the purchase of food. Food and beverage prices in Israel are on average 40% higher than in OECD countries and more than 50% relative to EU countries, the most noticeable difference being in the prices of milk, cheese and eggs.

There are quite a few reasons why food in Israel is more expensive (not in order of importance) - training expenses, labor costs, dairy and egg farm planning, import restrictions and other "vegetables" that increase the prices of everything that comes to our plate.

Reducing VAT on food prices is common in many countries around the world and can be an immediate solution - even if only partially - in lowering food prices in Israel as well. The idea of ​​"differential" VAT arises every few years, but traditionally provokes opposition from the Treasury.

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Differential VAT - reduced on food products and high on "luxury" may make it easier for those who have difficulty meeting the cost of living (Photo: ShutterStock)

Pros: A significant contribution to reducing the cost of living

"Reducing VAT on food can make a significant contribution to lowering the cost of living," says Walla!

. Housing and food prices.

The problem of the cost of living in the field of food in Israel stems, among other things, from the taxation policy in Israel. In Israel, full VAT is levied on food products in Israel (excluding fruits and vegetables) in contrast to the situation in most European and US policies where there is a VAT exemption on food products or a 50% tax reduction. "

According to him," VAT on food is a tax "It is unequal and is considered a regressive tax, ie a tax that increases inequality in the economy.

"The rate of expenditure on all food from disposable income is higher in the lower deciles, which means that the VAT burden on food is particularly high, relatively speaking, especially among the underprivileged populations.

"In the days when the state is working to tax sugary drinks that increase the cost of living and hurt mainly the lower deciles, it was appropriate to reduce VAT on other food products and thus contribute to reducing the cost of living problem and reducing inequality in the economy," Herzog said.

The empty cart of Israeli governments for generations: VAT increases inequality between parts of society (Photo: ShutterStock)

Cons: Need to learn from the mistakes of others

Dr. Michael Sarel, head of the Ecclesiastical Forum for Economics and

a former chief economist at the Ministry of Finance, believes this is a bad idea. .

There is always public and stakeholder pressure to reduce VAT on food or other products, but from what I know, nowhere do economists think it's a good thing. Economists in the UK, France, Germany, the US are very lucky to have it in Israel. . Sometimes you have to learn from the mistakes of others and not imitate them, "he explains in a conversation with Walla! Money.

Sarel explains why he thinks this is a bad idea: For the permanent, even when they decide they want to cancel it. "

Israel expands and says that: "Currently there are four major VAT exemptions in Israel (fruits and vegetables, Eilat, inbound tourism, personal imports up to $ 75 - SG), and if they were thinking today to start the VAT system no one would think Make them.

But it is already very difficult to eliminate them.

"" Why is it not good?

Once there is demand and supply and subsidize some product, some of the subsidy will not reach consumers, but will reach the entire sales chain, from the supermarket to farmers and carriers, and if it is an imported product then also to the transport company that brings the product from the airport and exporters abroad. Not everything will reach the consumer, it depends on the flexibility of demand and supply of the same product, "he explains.

"Champagne and caviar are also food" (Photo: ShutterStock)

Israel rejects the accepted theory that reducing VAT on food prices will lead to lower inequality and says: , Butter, bread, milk and more. Because they buy in larger quantities, in more expensive places and also more expensive products. And that gap is huge.

For example, champagne and caviar are also foods - but only upper percentages buy them. Therefore, if one wants to reduce inequality, it is much simpler and more efficient to give, at the same cost to the government, a certain amount of money per citizen or per household. Thus, households with low incomes will earn much more than as a result of a reduction in VAT, because as stated numerically the upper deciles spend on food much more than lower deciles, and if I give each citizen the same amount, I reduce inequality much more. "

Israel says that the exclusion of certain products will result in the creation of pressure groups in the Knesset with the request to exclude additional products.

"CEOs of companies and publicists will make a pilgrimage to the Minister of Finance, there will be debates in the Knesset committees, and many requests for exceptions."

In addition, Israel emphasizes that the sources of funding for the billions of shekels needed to reduce the VAT rate on certain products must be taken into account. Health and more), so the cost of living of the citizens will not decrease at all and will even increase.

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