Treasury hits back at think-tank study

In detailed response sent to the 'Post', ministry responded to a series of specific points raised by conservative US think tank.

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June 12, 2013 22:27
3 minute read.
Finance Minister Yair Lapid at the Knesset's Finance Committee, June 11, 2013.

Lapid at Finance C'tee meeting 370. (photo credit: Knesset)

 
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The Finance Ministry on Wednesday shot back against a study by the American Enterprise Institute, a conservative US think tank, which said plans to raise corporate tax would endanger foreign investment in Israel, endangering its status as “Start-up Nation.”

In a detailed response sent to The Jerusalem Post, the ministry responded to a series of specific points analyst Alex Brill raised in the study.

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The study noted that Israel’s corporate tax rate was higher than the OECD average and is scheduled to rise, which would make Israel a less attractive environment for investors. “Israel was the only OECD country to raise its statutory rate in 2012,” the report said. “In fact, Canada, Finland and the UK all cut their corporate rates.”

The Finance Ministry countered that a long-term perspective was necessary for international comparisons.

From 2008-2013, it said, the corporate tax rate in Israel had dropped from 27 percent to 25%, while it remained static in 16 of 34 OECD countries for which data was available, rose in five and fell in 13 others.

“On that basis, it seems Israel improved its competitive standing during the crisis years in comparison with the rest of the OECD countries,” the ministry said.

The scheduled rise of corporate tax to 26.5% in 2014, it said, was part of a package intended to maintain Israel’s fiscal stability, a factor that is also important for investment, and would still represent an overall drop in rates since before the financial crisis.



The ministry also denied there were any plans to cancel lower taxes rates through the law to encourage capital investments. “This tax remained low in comparison to competitive countries,” the ministry said.

The study had alleged that “Israel is publicly debating the elimination or curtailment of pro-export-tax benefits for some Israeli companies under the Law for the Encouragement of Capital Investment,” and that “the reduced rate for qualifying companies – 12.5 percent for production located in central Israel and 7 percent for activity located elsewhere in Israel – is currently scheduled to fall to 12 percent and 6 percent, respectively, in 2015.”

The Finance Ministry said companies making big investments would pay 15% in the center and 10% in the periphery, while bigger investments would bring the rates down even further to 8% in the center and 5% in the periphery.

The AEI study did not specifying the source of “empirical evidence from cross-country analysis [that] suggests that the one-point rate increase in 2012 may raise little or no revenue, but may do much to discourage both investment and repatriation of foreign-earned income back to Israel,” the ministry said.

A 2007 study by Gruver and Rauh found that corporations are not very reactive to changes in the base corporate tax rate. To raise the same amount of taxes from individuals as from the corporate tax boost, the Finance Ministry said it would have had to raise the highest bracket’s income tax by 5 percentage points, “which certainly would have negative effects not worse that raising the corporate tax.”

The Finance Ministry also attempted to refute the study’s citation of a work by economists Ruud De Mooij and Sjef Ederveen that said “a one-percentage-point reduction in the corporate tax rate results in a 3.3 percent increase in FDI [foreign direct investment].”

“These results were obtained from previously published studies and suffer from known inadequacies,” the ministry said.

The results were biased because studies showing minimal or no effects had a lower chance of being published, it said. Even so, there was a high variance in the results of the study, meaning that other factors could have significant impact in determining the effects of tax policy. Even a 3.3% reduction in FDI would be negligible, given the high variability of investment growth Israel has received in recent years, such as a 60% drop in 2009 and 220% rise in 2006, the Finance Ministry said.

“There are other variables affecting foreign direct investment, and the corporate tax rate is just one of them and not the most significant,” it said.

The Finance Ministry said it believes that given necessary increases in the various tax rates – including VAT, income, real estate and sales – raising corporate tax 1% in 2012 and another 1.5% in 2014 was a moderate choice “designed to return financial stability to Israel, while minimally harming growth or increasing inequality.”

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