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The recent decade saw a dramatic rise in personal imports. Companies such as Amazon.com, eBay, and Ali Express have made online retail accessible to every person with an internet connection. This is mainly driven by technological advancements, but one of the driving factors is a significant tax incentive these companies enjoy. Not regarding corporation tax,  which is hotly debated in the west, but rather in VAT exemption.

They don’t get it directly, but rather as part of governments’ policy regarding personal imports. In many countries, importing products under a certain amount is not taxed at all. This means that the same product can be sold more cheaply from the other side of the world than in the same country, in which sellers do have to pay VAT and other local taxes. This leads to many local retailers claiming this is an unfair competition when their own government is giving favorable conditions to foreign retailers on their expanse. Does it worth it? Let’s look at the Israeli case.

In 2008, the government gave VAT exemption to any product which is also exempt from import tariffs. In 2011, the government responded to demonstrations regarding the cost of living by giving such an exemption to any personal import under 75$. How did this affect the Israeli economy?

First of all, this policy is not progressive in any way. Most of the internet purchases are not done by the poorest in society, who do not always have an internet connection or technological literacy to use it. This way, the middle (5th) income decimal is spending 2.15 more than the poorest decimal as a percentage of their income, and the top decimal is spending 2.5 times more than the poorest one.

Moreover, according to our calculations, this tax inconsistency would cause:

• Tax revenue loss of 1.6 Billion ILS (450 Million USD)
• Private sector revenue loss of 4.9 Billion ILS (1.4 Billion USD)
• Loss of 10,000 retail jobs

Moreover, personal imports expand as part of general retail in about 1 percentage point a year, which means that by 2022 there would be:

• Tax revenue loss of 2.3 Billion ILS (650 Million USD)
• Private sector revenue loss of 7 Billion ILS (2 Billion USD)
• Loss of 14,000 retail jobs

These losses are difficult to justify as the poorest are not benefited by this policy, and may be affected by the loss of jobs, loss of business opportunity, and of course – the loss of tax revenue that can be directed towards poverty-fighting measures. It would be advised to use other measures to reduce the cost of living – From lowering taxes for everyone, to simplifying and reducing regulations. VAT exemptions seem like a suboptimal way of achieving these goals, as economic consequences are significant.

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