Read My Lips: Some New Taxes

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For years I wrote of my opposition to the law encouraging capital investments. I argued that it benefits the wealthy and raises taxes for everyone else. I said it distorts economic activity, hurts employment and growth, and levied out other such criticisms.

But in October 1995, I attended the Amman Economic Summit, a regional conference organized two years after the signing of the Oslo Accords and marking the height of euphoria in relations between Israel and the Arab countries. Shimon Peres and Yitzhak Rabin were among the stars of the summit and the future of the Middle East, in an era of peace, seemed the most promising thing in the world.
During the conference the Palestinian economic minister came up to me and said:

“We can never defeat you, because your economic development is 10 levels above ours, and if that was not enough, now you’ve got Intel. Do you know how a company like this could raise us up if they would have built their factory in Ramallah and not in Kiryat Gat?”

At that moment I began wondering: Were all the articles I had written opposing the law to encourage capital investments imprecise? Could there be another angle to the issue?

In the economic newspapers this week, warring headlines struggled to outdo one another in vilifying the international companies of Teva, Iscar and Check Point. According to these reports, they are a bunch of swindlers paying a ridiculously low tax rate – a few percentage points only – and thus snatching the bread and milk from the mouths of babes.

While the regular corporate tax rate is 25 percent, the claims went, these guys were paying only 5 percent, costing the economy an annual NIS 5.6 billion in lost tax revenue. They should also be required to pay 25 percent, and all would be well.

That sounds excellent; both in terms of justice and economics. But who will guarantee that if we raise taxes on Intel to 25 percent, it won't jump ship and abandon Israel entirely? As we speak, its most advanced facility is being built – in Ireland.

You might ask yourself why you should care about Intel. It doesn’t have to do you any favors. But when a major strategic investment like those provided by Intel, Iscar, Teva and Check Point are examined closely, one must take more than its direct taxes into account. The external positive influences on the economy also need to be considered.

Such companies bring with them advanced standards of technology and management. They raise the level of local industries that work with them and they provide a livelihood not only to their thousands of employees but also to thousands of suppliers and subcontractors. Engineers and researchers who have left these companies have established start-ups based on the knowledge they acquired there. Intel, for example, raised the level of science education in Kiryat Gat and the number of high school students who received matriculation certificates. It even improved the self-image of the city's denizens, who know their town is no longer home only to textile, food, wood and iron industries. It is a place of high-tech and progress.

Still, the current law exaggerates the benefits it accords. A tax rate of 5 percent for international companies, and a rate of 6 percent to 12 percent for companies that export only 25 percent of their volume, is too low and should be increased. But this should be done gingerly, out of a realization that the world is open and competitive.
Israel must be particularly cautious, too, because of its political-security situation.

When the danger of war lurks, risk rises exponentially. There are not many countries where Katyusha rockets fly one day, it goes to war another, and it is always under threat. Such circumstances certainly are not a draw for foreign investment.

In other words, the rejectionist policy of Israel’s government and its unwillingness to enter negotiations comes at a heavy economic cost. It forces us to “bribe” international companies with extensive tax benefits, and even those are not always enough. Look at Intel, which opted for Ireland.

Intel's offices in Israel.Credit: Courtesy of Intel Israel

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