When the Big Guys in Israeli Industry Get All the Breaks From the Government

Giant export firms are the alpha dog when it comes to incentives from the government, but what is it doing to help the local market and cost of living?

 Finance Minister Moshe Kahlon, in October 2015.
Michal Fattal

Is Israeli government policy widening the gaps between advanced industries and low-tech companies? Is the government deliberately making life harder for local trading and services firms – and thereby, causing the cost of living in the country to climb?

Seems so. Giant export companies with lots of employees are the alpha dog when it comes to government incentives, and if the giant is a multinational that's based overseas, all the better. These are the types of corporate entities – the ones that undertake to export a lot, and also employ a lot – that are boosted by the state through the Investment Encouragement Law.

The encouragement takes the form of tax breaks or outright grants, or both. The recipients of such largesse over the years include the likes of Intel, Teva Pharmaceutical Industries, Israel Chemicals and Check Point Software Technologies. All of them huge, powerful export companies.

On top of the candy they have already received, Finance Minister Moshe Kahlon is moving to lower their corporate tax to an especially low 6%. Regular corporate tax in the country is 25%, but in practice, many high-tech companies pay less, because of the Investment Encouragement Law (which applies to companies with revenues greater than 10 billion shekels, or about $2.6 billion, a year). They also pay lowered dividend tax of just 4%.

It is easy to find rationale for being generous to multinational high-tech companies: The idea is to attract them to Israel.

The phrase “high-tech” evokes images of global corporations, international conventions, terrific employment conditions, keyboards being tapped in air-conditioned rooms, exports. It’s easier to envision the future there than in greasy metal workshops or tomato-canning factories. We’d all prefer to see the kids working in gorgeously designed work spaces with free espresso. But most Israelis don’t work in places like that.

Last week the chief economist at the treasury reported that the multinationals operating in Israel achieve better productivity than local companies do. It makes sense. The companies that come here are at the forefront of technology, selling advanced products and services. They are highly productive, and would inevitably win in a contest in that realm against virtually “all” Israeli industry, which includes high-tech and low-tech as well.

The system of incentives leads to a single conclusion: The state lavishes its largesse mainly on the strong and powerful. There are explanations, some Darwinistic: the strong win, and the winner takes all. If they’re so good at making products or services, they’re probably great at wresting perks from governments, too. They want to make money and the government wants jobs to be created and more exports, and likes the fact that they bump up the quality of the labor force in Israel.

Multinationals have alternatives. They don’t have to work in Israel. They need wooing. But wooing them means that the government is neglecting local companies. Absent incentives to grow more efficient and to improve their productivity, the local entities keep lagging behind. Their workers do not improve, and neither does their equipment, resulting in high prices that jack up the cost of living in Israel.

Zvi Eckstein, dean at the Interdisciplinary Center, Herzliya, has been pushing for the government to change its policy on prioritizing exporters. He sees no reason to encourage the latter because Israel doesn’t need foreign currency any more (some argue that its foreign currency reserves, approaching $100 billion, are already top-heavy). And favoring the exporters is bad for the local companies and pushes up the cost of living in Israel.

It’s like taking a classroom of 40 kids and deciding to invest mainly in only the two brightest ones, leaving the rest of the pack to their own devices.

Some would argue that the two brightest merit the investment because they’ll contribute more to the rest by creating prosperous businesses, or managing public systems. Maybe so, but it also means forgoing the option of getting better achievements from the rest, and realizing their potential.

So here we bend over backward to court Intel and make sure it operates out of Israel, because it’s an MVP and the figures it generates, in terms of jobs and exports, are very big, and immediately impact the national accounts. The results of the state’s encouragement of Intel are palpable compared with, for instance, a national project to stimulate productivity in thousands of small- and medium-sized businesses. And this neglect carries a price that nobody measures, until it hits us in the form of the high cost of living and meager productivity.