Lapid looking sullen 370.
(photo credit: Marc Israel Sellem/The Jerusalem Post)
WASHINGTON – Finance Minister Yair Lapid’s plan to hike corporate tax rates on
foreign direct investors will jeopardize Israel’s standing as the “start-up
nation,” according to a report by the American Enterprise Institute, a
conservative think tank based in Washington.
The increases will affect
Israeli workers as much as wealthy investors, which challenges Lapid’s argument
for the cuts, the report said.
The finance minister asserts that
“distributive justice” requires such a policy and that fewer large companies
will now enjoy the sort of mammoth tax benefits that have angered some members
of the public, it said.
Ever since Intel invested heavily in Israel in
the 1970s, almost every major American and European digital company – including
Google, Apple and Facebook – have farmed for talent there, building major
campuses and office facilities throughout the North, the report said.
don’t expect those companies to uproot themselves [as a result of the tax
hike],” Alex Brill, the author of the report, told The Jerusalem Post
. “But for
these multinational corporations, when they go to spend their next billion
dollars, that’s when the the effects will be felt.”
investment, or FDI, is a major contributor to Israel’s economic growth since the
Law for the Encouragement of Capital Investment passed in 1959. Before that,
Israel Bonds helped build the country in its founding years on foreign
Comparisons to US corporate tax rates are moot because companies
have a vested interest in accessing the large American marketplace of more than
313 million people, Brill said.
“Israel is so small in relation to the
global economy, and so much of the activities of these companies are
flowthrough,” he said.
Lapid argues that shared sacrifice is required to
curb a growing income gap in the state and that Israel’s current corporate tax
rates are relatively low, meaning it can afford a modest hike.
also answered a swell in anger over a reported $4 billion in tax benefits to
four companies, including Intel. Lapid has since raised rates on companies that
export a quarter of their output from 12.5 percent to 15%.
acknowledged that Israel’s human capital – its Technion graduates, its military
training and ethos – are ultimately what attract FDI. If valued enough, the
belief that such a resource cannot be found elsewhere might continue to attract
investor dollars, he said.
But Brill cited several economic studies
suggesting that high corporate tax rates on small, open economies such as Israel
can directly affect workers’ wages, when fewer plants are built and more
projects are delayed.
Israel’s economy grew 14.7% between 2009 and 2012,
and exports represented 37% of its gross domestic product in 2011. Compared with
other OECD companies, Israel’s decision to increase corporate tax rates will be
an exception this year.
Knesset Finance Committee chairman Nissan
Slomiansky (Bayit Yehudi) said he understood the thinking behind the study and
the importance of bringing companies to Israel.
“When [Prime Minister
Binyamin] Netanyahu was the finance minister he brought down the corporate tax,”
he said. “I hope that in 2015 we can bring it down again, too. But it must be
said that there is a deficit of NIS 40 billion, and if we didn’t raise corporate
tax, there would have to be other cuts on the public.”Niv Elis
contributed to this report.