Top treasury economist quits over tax-free home plan

Top treasury economist quits over tax-free home plan

Economics director says exemption for young couples is populist, may actually lead to increase in prices

Dr. Michael Sarel (Photo credit: Youtube screen capture)
Dr. Michael Sarel (Photo credit: Youtube screen capture)

A top Treasury official announced his resignation on Wednesday in protest of Finance Minister Yair Lapid’s decision to eliminate sales tax on the purchase of new apartments by young couples, saying the plan was likely to actually lead to increased prices.

In a letter to Lapid also released to the press, Dr. Michael Sarel, director of Economics and State Revenues, said he thought the decision was wrong “from almost every possible angle.”

The move, he wrote, “may increase the surplus of demand in the real-estate market and create renewed pressure for a rise in apartment costs.”

On Tuesday, the Finance Ministry revealed a plan to offer tax-free homes for first-time buyers in an attempt to ease a national housing crisis.

The plan would eliminate the 18% Value Added Tax for new apartments purchased by a couple who have not previously owned an apartment and have at least one child. One of the applicants must have completed either military or national service, and the couple must reside in Israel and agree not to sell the apartment within five years of purchase, Yedioth Ahronoth reported on Tuesday.

The proposal contains provisions to prevent contractors from simply raising prices to compensate for the difference, and to prevent changes in the general market as a result of the eliminated VAT, according to the paper.

However, Sarel said tax breaks tended to complicate tax laws, encourage tax evasion and shift the burden unfairly to those who would not be covered by the tax benefits. Furthermore, the cuts would later force the government to raise taxes for the general population in order to cover its costs.

In some cases, Sarel said, the benefit from an exemption to one specific group was “immeasurably lower than the cost imposed upon the rest of the public.”

According to Finance Ministry sources cited in the report, the proposal, which aims to help alleviate the chronic shortage of affordable housing for young first-time buyers, came after extensive deliberations within the Housing and Finance ministries and was pushed through by Lapid despite opposition by senior ministry staff.

Sarel insinuated that Lapid’s move was a “populist move, mistakenly viewed by the majority of the public as a sound economic step, despite widespread agreement among professionals that this is not the case.”

He added that tax exemptions were notorious for being virtually impossible to overturn, even when their efficacy and value had been disproved.

For these reasons, Sarel said, he could not support the decision.

“Such support would effectively represent a personal lack of responsibility and a colossal professional failure,” he wrote.

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