Israel's Finance Ministry Plans Tax Overhaul Amid AI Revolution Concerns

Israel's Ministry of Finance is preparing a tax plan to address potential revenue shortfalls and economic shifts expected from the artificial intelligence revolution. The ministry is considering measures such as increasing taxes on capital, implementing a property tax on undeveloped land, raising taxes on luxury goods, and ensuring value-added tax is collected on digital services provided by non-residents to Israeli consumers, a measure referred to as the "Netflix tax." Additionally, proposals include introducing fees and taxes on essential resources like energy and land for data centers, while continuing to incentivize companies to distribute "locked-in" profits.

These proposals stem from a call for suggestions on tax policy in the age of AI, initiated by the ministry in July. An interim report, prepared by a working group led by the ministry's chief economist, Dr. Shmuel Abramson, is expected to be presented to the next government. The report acknowledges that past technological revolutions boosted productivity without causing mass unemployment, but expresses significant uncertainty regarding AI's impact.

A primary concern for the ministry is the potential gap between job displacement and new job creation. The report outlines an optimistic scenario of productivity growth with minimal labor market disruption, contrasted with a pessimistic scenario of structural unemployment and wealth concentration. Even if a long-term equilibrium is reached, the transition period could see rising unemployment.

Questions remain about whether AI-driven automation will lead to overall economic growth or the proliferation of "good enough" technologies that replace workers without significantly enhancing productivity. Most respondents to the ministry's call anticipate increased inequality, as the benefits of productivity gains are likely to accrue to highly skilled and highly paid workers. The report also notes that inequality could widen between nations, with AI-controlling corporations concentrated in the U.S. and China, potentially leaving smaller countries like Israel to find their niche in the global value chain.

Authors of the report estimate a short-to-medium term decrease in labor's share of GDP, leading to a shrinking tax base, as labor is taxed more heavily than capital in Israel. The ministry also fears that Israeli workers' compensation will be replaced by payments for services rendered from abroad. Furthermore, a reduction in R&D staff could decrease profits attributed to international corporations' development centers in Israel. However, the ministry suggests avoiding taxes on companies above the global minimum tax level and foregoing specific taxes on AI resources, robots, AI agents, and computing power. A separate group is tasked with adapting the tax system to encourage companies to register intellectual property in Israel, aiming to prevent the offshoring of income from patents, algorithms, and software.