US think tank slams Lapid’s proposed tax hikes

Finance Minister's plans to raise corporate tax rates is roundly criticized by the American Enterprise Institute.

June 10, 2013 22:28
2 minute read.
Finance Minister Yair Lapid/

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.

“We 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.”

Foreign direct 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 money.

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.

The move 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%.

Brill 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.

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