Israel's Treasury Proposes New Taxes to Counter AI's Economic Impact

Israel's Ministry of Finance is preparing for the potential economic disruptions of artificial intelligence, anticipating a decline in state tax revenues. To address this, the ministry is considering new tax measures focused on wealth and consumption. Among the proposals are a property tax on vacant land to incentivize construction, increased taxation on luxury goods, and stricter enforcement of VAT collection on digital services provided by foreign entities to Israeli consumers, a measure often dubbed the "Netflix tax."

The ministry's proposals stem from a call for public input issued in July regarding a new tax policy for the AI era. The interim conclusions from a team led by Chief Economist Dr. Shmuel Abramson are expected to be presented to the next government. While technological revolutions have historically boosted productivity, the Finance Ministry acknowledges significant uncertainty about AI's specific impact, particularly concerning job displacement and the potential for increased wealth concentration.

Concerns include the possibility of structural unemployment and widening income inequality, as the benefits of AI-driven productivity gains might accrue disproportionately to highly skilled workers and capital owners. The report also notes that smaller countries like Israel will need to strategically position themselves within global value chains, building on past successes in areas like cyber and fintech.

Specific tax proposals include a property tax on vacant land, estimated to generate 9.5 billion shekels annually if fully implemented, and a tax on luxury goods consumption. The "Netflix tax," which aims to collect VAT from foreign companies selling digital services to Israeli consumers, was previously estimated to bring in 500 million shekels per year.

Additionally, the ministry is exploring taxes on energy and land use for server farms, while strongly opposing a "robot tax" or specific taxes on AI computing inputs. To maintain Israel's attractiveness for investment, the proposals emphasize clear definitions for AI income taxation, streamlined tax deduction mechanisms for international operations, and avoiding taxation beyond global standards like Pillar 2. The ministry also suggests measures to encourage the registration of intellectual property and patents within Israel.