# Step 249: an Israeli base year, including taxes on production

**Why.** Steps 205F and 230 put Israeli tax values into a stylised base year. The share of profits
within reach of the corporate tax ramped from 1 down to 0.42 during the transition while existing
government spending stayed at the year-0 budget: a revenue cut of about six points of output, phased
in with automation. That cut, not automation, drove the result that "financing comes first", and
taxes on production and imports (VAT and others, 11.3% of GDP) were left out.

**What.** The base year itself is Israeli, at market prices (output 100 = GDP; means for 2021-2024
from `data/processed/israel_macro_inputs_v230.json`):

| Item | Value | Basis |
|---|---:|---|
| Labour income | 49.95 | ILO labour income share incl. self-employed |
| Tax on labour income | 23.9% | PIT + SSC 11.94% of GDP |
| Net taxes on production and imports | 11.28 | levied on nominal output, paid from firm revenue |
| Profits (residual) | 38.77 | |
| Corporate tax | 23% x 0.432 of profits | CIT 3.85% of GDP |
| Government debt | 64.7 | IMF gross debt |
| Real interest on debt | 1% | step 230 |
| Total revenue | 27.1% of GDP | year 0 balances by construction |

Tax rules stay at Israeli values throughout (no ramp). Two reforms ramp in with automation: tax reach
0.60 and a 30% rate. Runs: 144 cases (pass-through x productivity x ownership x tenure x stress),
strict closure (v98) and borrowing closures (step 248: net debt cap 90% of output, firm overdraft),
consumption share 0.90 and 0.76 (step 231). Housing payments keep the grid's burdens, as in step 230.
Generated by `scripts/israel_base_year_v249.py`; archived in `data/processed/israel_base_year_v249.json`.

## Results (consumption share 0.90)

| Setting | Completed (of 144) | Both displaced kept 90% | Israeli tenure mix, pass-through 0 / 0.5 / 1 |
|---|---:|---:|---|
| Step 230 (ramped tax, strict) | 43 | 22 | n/a |
| Israeli base year, strict | 64 | 36 | 20% / 27% / 26% |
| Israeli base year, closures | 144 | 82 | 65% / 64% / 55% |
| + tax reach 0.60, closures | 144 | 89 | 69% / 67% / 55% |
| + rate 30%, closures | 144 | 85 | 68% / 64% / 55% |

1. **Most of "financing comes first" was the ramp.** With an Israeli base year, paths stopped by the
   government's cash constraint fall from 101 to 32 of 144 under the strict rules, and completions rise
   from 43 to 64.
2. **With borrowing closures, the displaced keep their consumption in 57% of Israeli cases** (82 of
   144), and the share falls from 65% to 55% with full pass-through. Peak net debt stays near its
   starting level in the median case; in 8 cases existing commitments push it past the cap.
3. **Small productivity gains are the problem case.** At a 25% gain no case preserves the displaced
   (0 of 48), against 44 of 48 at 50% and 38 of 48 at 100%: with little growth the budget cannot pay
   the benefit within the debt cap.
4. **Tax reforms help modestly**: reach 0.60 adds 7 cases, a 30% rate adds 3.
5. **Relative position**: displaced workers end 26% (no debt) and 21% (with debt) below the matched
   control at the median; retained workers 33% above.

## The consumption share is decisive, for a model reason

At the survey consumption share (0.76) with closures, 127 of 144 cases preserve the displaced and the
tax reforms make no difference. Under the strict rules the same change makes things much worse (2 of
144). The reason is the model's closure: investment is whatever output is not consumed or bought by
the government, so more saving automatically becomes more capital and, with capital feedback, more
output and revenue. There is no demand shortfall in the model. When firms cannot borrow, the extra
investment ends in a liquidity stop; when they can, it ends in growth. This is a structural property
of the model and has to be stated as such: results that depend on the consumption share depend on
"saving becomes investment".

## Limits

- Housing burdens are the grid's, scaled to reference income, not the Israeli burdens of step 205.
- Indirect taxes are levied on firm revenue; with a fixed nominal wage their incidence falls on profits.
- Interest stays at 1% real whatever the debt level.
- The 2021-2024 means include COVID-19 and war years.