Leading professors oppose 0% VAT plan

A group of leading economists addressed the Knesset Financial Committee yesterday through the media, calling on the committee to vote against Minister of Finance Yair Lapid's plan to eliminate VAT on the first apartment for young couples.

"In this open letter, we call on you to oppose the 0% VAT plan for housing� It is a bad proposal that does not reduce excess demand in the real estate market, and is even liable to further aggravate the problem of housing prices," the group of professors wrote. The group includes Prof. Zvi Eckstein, Prof. Avi Ben Bassat, Prof. Momi Dahan, Prof. Reuben Gronau, Prof. Michel Strawczynski, Prof. Omer Moav, Prof. Dan Ben David, Prof. Moshe Justman, and Prof. Leah Achdut.

Such letters are rare, because economics professors do not usually express their views through a petition of this type. The last petition along these lines was signed in the summer of 2011, with the outbreak of the social protest, a historic macroeconomic and social event. Furthermore, this petition unites economists with very different ideologies, such as Prof. Dahan, a leftist who advocates a substantial increase in civilian spending and a higher tax burden, and Prof. Moav, known for his rightist views.

"This organization resulted from the unholy combination of economic illogic, social illogic, and enormous cost. How many measures do you know of that are both economically and socially illogical and involve a huge budget of NIS 20-30 billion a year? This is what justifies this letter, and that is why both Omer Moav and I are signing the letter," Hebrew University of Jerusalem Federmann School of Public Policy & Government head Prof. Dahan, one of the petition organizers, said.

The letter further asserts that the proposal also "increases the macroeconomic risks stemming from excessive investment in residential real estate financed partially by credit from the financial sector." Experts also believe that "Politically, it will be practically impossible to cancel the VAT exemption in the future, and the damage that will accumulate over the years will be heavy." This is the reason why Dahan used the figure of NIS 20-30 billion; the petition signers are looking at the cost over decades, not the annual cost.

Former Ministry of Finance chief economist Dr. Michael Sarel, who resigned several months ago, after Lapid decided to introduce 0% VAT, strongly attacked, and is still attacking, Lapid and his initiative.

The professors also emphasize that this measure will also increase inequality, and will require "establishing a cumbersome and expensive price supervision and construction specification mechanism, which is liable to encourage aggressive tax planning, and will probably fail to prevent the transfer of a considerable share of the benefit to the contractors."

"In view of all this, we call on you to oppose the 0% VAT plan. We are at your disposal for the purpose of displaying in detail the arguments against the plan," the professors wrote.

Published by Globes [online], Israel business news - www.globes-online.com - on July 3, 2014

Leading professors oppose 0% VAT plan

"The plan is economically and socially illogical," says a letter from left and right wing professors.