Following a public outcry in the West Bank, Palestinian Prime Minister Salam Fayyad this week suspended some of the austerity measures he recently proposed.
In early January, Fayyad's cabinet launched an austerity plan, including tax hikes, early retirement for civil servants and government spending cuts. It was a bid to reduce the expected $1.1 billion deficit in the Palestinian Authority's $3.5 million budget for 2012.
Fayyad attributed the increased deficit to the global economic crisis, which is preventing donor states from contributing their pledged support for the PA.
Following public protests over the economic measures, Fayyad – who is also the PA's finance minister – said earlier this week he would freeze the tax rise until February 15 and "open a dialogue with all institutions and factions."
The austerity measures call for raising the income tax ceiling from 15 to 30 percent and imposing taxes on farmers, professionals and institutions that have previously been exempt from paying tax. Under the plan, three-quarters of the pension allocations will be taxed, as well as stock-market profits and real-estate deals.
Fayyad also said some 26,000 civil servants and security staff, who have been employed by the authority for the past 15 years, will take early retirement.
The measures caused fomentation throughout the Palestinian public, resulting in demonstrations, rallies and protest marches against the economic package.
Stock-market executives said the new income-tax law passed in November 2011 would drive away investors, while private-sector representatives threatened to petition the Palestinian High Court of Justice against the legislation.
An economist from Birzeit University said raising the direct taxation would reduce consumption, which in turn would reduce VAT collection.
Bassam Salhi, leader of the Palestinian People's Party (PPP ), which objects to the economic measures, told Haaretz the income tax proposal had been rejected by a parliamentary committee due to its flaws. Despite this, it was submitted to Palestinian Authority President Mahmoud Abbas for ratification without hearing reservations or holding a dialogue with the public.
The law gives tax officials excessive power that infringes on the principle of the separation of authorities, he says.
Leading Palestinian economists and leftists say the cabinet is taking economic measures as though it were an independent state, ignoring the fact that the problems stem from the Israeli occupation blocking the West Bank's development.
Instead, the economic policy must be part of the struggle against the occupation, Salhi said.
"For example, the cabinet must reduce VAT in order to bring down the cost of living," he added. "Fayyad's policy, aspiring to reduce foreign support, doesn't make sense, because it puts the burden of the occupation on the Palestinian people and reduces their ability to deal with the oppression."
Salhi and the other leftist organizations say the 30 percent income tax ceiling is not enough, since it doesn't make sense to tax a person who makes $200 a year the same as those who make millions of dollars.