What is the best thing Israel could do to improve the economy with $300 million? Should it invest in a single factory, even one that is advanced and innovative? Or would the state do better to spread out the benefits to scores or even hundreds of medium-sized businesses in the hope that some of them will grow into big ones? Which of the two alternatives will create more employment, economic growth and exports?
These are important questions that for whatever reason the government isn’t asking itself as it goes ahead with plans to subsidize Intel’s $5 billion plan to upgrade its Kiryat Gat semiconductor plant.
The government aid will come in two ways, as an outright grant of about $300 million and more in the form of a very low tax rate of 5%. The rest of the $5 billion will come from Intel itself, which is certainly a major fillip for the economy that shouldn’t be ignored. It’s not often that a giant multinational makes such a big commitment to Israel. But Intel believes in Israel and Israel believes in Intel.
The problem is that the decision-making process in all this is lacking. It only relates to the issue of how to coax Intel into investing here rather than to the issue of what’s the best way the government could be spending its $300 million. The government looks at the issue as deciding what conditions will convince Intel to expand its operations and contribute to exports and job creation in the south. Would Intel invest without the aid, or what would be the minimum amount it would need?
These questions are especially relevant nowadays because of recent developments.
The first is the impact of the Trump tax reforms that cut the corporate tax rate in America to 21% from 35% with the aim of bringing back jobs to America. The second is the problems at Teva Pharmaceuticals, the Israeli drugmaker whose financial problems have forced it to make massive layoffs in Israel even though it got extremely generous tax treatment over the years. The third is the growing criticism by small and medium-sized business about the government preference for big companies and big investments, even though small business traditionally is the biggest generator of jobs.
The U.S. tax reform is in place and the Israeli government knows it will change the rules of the game about how companies decide where to locate their offices and factories.
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Prime Minister Benjamin Netanyahu wants to lower taxes in Israel in response, but he wants to do it selectively. If a big company wants to come to Israel, he’ll roll out the red carpet and offer tax breaks. If a small local company wants to expand, it will have to pay the standard tax rate. It has no choice but to operate in Israel, so why should it get any favors?
Intel isn’t an ordinary company as far as Israel is concerned. It has been here since 1974 and has invested $34 billion. Today Intel’s factories and research and development centers in Israel employ 12,000 people, a 10th of its global workforce. It spent more than $15 billion last year buying the Israeli company Mobileye. There is no other multinational with anything like that presence in the Jewish state.
But Intel has also received $1.5 billion in direct state aid and has enjoyed tax benefits worth billions more. Along with Check Point Software, Teva and Israel Chemicals, it enjoys the lion’s share of the breaks offered by the Israeli government.
Israel has improved the terms of the Law for Encouraging Capital Investments, which is how this aid is administrated, but the changes don’t include questioning giving the aid to giant corporations to begin with.
The temptation for the government to just go ahead and give Intel the assistance is big. Intel has a proven record of generating jobs and apart from the 12,000 on its payroll it subcontracts to businesses that employ an additional 36,000. It has bought some $10 billion of goods and services locally over the last decades, three-quarters of it from small and medium-sized businesses, according to its own figures.
Over the decades in Israel, Intel has kept to its word. It’s a global company with a big and stable business. Locally it serves as a school for best-practice management and the latest development in high-tech. Many Intel alumni have gone out and started their own companies. It accounts for 8% of the country’s tech exports.
That’s impressive but still doesn’t answer the question of what would happen to the $300 million if it went directly to smaller businesses. It’s a question that has to be asked over and over again because it’s the nature of Intel’s business that factory upgrades costing billions of dollars are required every few years. In the current round, the $5 billion will add another few hundred jobs, Intel says.
Unlike ordinary applicants, Intel doesn’t go through the regular bureaucracy: its application will be weighed by a three-person committee from the Finance Ministry, the Economy and Industry Ministry and the Israel Tax Authority. The approval process will take several weeks while officials examine the details. They would do well to look beyond them and ask the bigger questions about whether the $300 million could be spent better.