What is the preferred way for a Jewish state to raise money from its citizens to pay for public expenses? According to Rabbi Shlomo Ishon, head of the Keter Institute, which deals with matters of Jewish law as they affect the economy, an income tax that can be tailored to the means of different segments of the population is better than a one size fits all Value-Added Tax (VAT).

The Institute on Monday released a position paper stating its reasons for preferring income taxes over sales taxes. According to Rabbi Ishon, direct taxes (like income tax) are much more progressive than indirect taxes (like VAT), leveling the playing field for the poor. But over the past decade, the government has slashed direct taxes, while increasing indirect taxes – resulting in a growing income and living standards gap among rich and poor Israelis.

The Treasury is planning to cut an income tax increase that had been planned for next year, to be replaced by increases in VAT and other taxes.

“This step further destroys the balance between the different types of taxation, and benefits middle income and wealthy income earners over weaker segments of society,” Rabbi Ishon said. “Different methods should be used to raise taxes that would restore that balance, enabling the poor to live more respectably.”

As a start, Rabbi Ishon recommends lowering the VAT rate by a half a percent, a move that would cost the state NIS 2.3 billion. Direct taxes could be raised to make up that money, he added.

“The Treasury says that avoiding the increase of income taxes will help the economy grow, with the increased income of the middle class and wealthy 'trickling down' to the poor. But this model has not proven itself elsewhere.” If anything, the best way to help the economy, he said, was to cut both income taxes and VAT, leaving more disposable income in the hands of everyone, which would increase economic activity, benefiting everyone.