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

Israel's Ministry of Finance is developing new policy directions to address the economic repercussions of artificial intelligence (AI) on the national economy. A special team, led by Chief Economist Dr. Shmuel Abramzon, is considering shifting the tax burden towards capital, luxury goods, and vacant land. The ministry aims to bolster tax revenues in anticipation of AI's potential to reduce state income from taxes, while firmly opposing a specific tax on robots and computing.

Key proposals include a property tax on vacant land to incentivize construction, increased consumption taxes on luxury items for the wealthy, and enhanced enforcement of Value Added Tax (VAT) collection on digital services provided by foreign entities to Israeli consumers, a measure colloquially termed the "Netflix tax." The ministry is also exploring the possibility of taxing energy and land used for server farms.

These recommendations stem from a call for public input issued in July regarding a new tax policy for the AI era. The interim findings are expected to be presented to the next government. While acknowledging that technological revolutions have historically boosted productivity, the ministry highlights significant uncertainty surrounding AI's precise impact, particularly concerning job displacement and the potential for increased wealth concentration.

Concerns also include the widening gap between job losses and new job creation, with pessimistic scenarios predicting structural unemployment and economic inequality. The ministry notes a general expert consensus on a potential decline in the labor's share of GDP in the short to medium term, a trend already observed in Israel and other nations. The report also touches upon the debate over whether AI will spur overall growth or lead to "good enough" technologies that replace workers without significantly improving productivity.

Further considerations involve the potential for increased wage disparities, with many respondents to the call for input predicting a widening inequality due to the concentration of productivity gains among highly skilled and educated workers. The report suggests that smaller nations like Israel must strategically position themselves within global value chains, building on past successes in areas like cybersecurity and fintech, though past performance is no guarantee of future outcomes.

The proposed tax measures aim to preserve the tax base amidst fears of rising unemployment, advocating for higher taxes on capital while carefully considering the potential negative impact on investments. The property tax on vacant land, previously considered to fund war expenses but ultimately removed from legislation, is seen as a potential revenue source. The "Netflix tax," estimated to generate approximately 500 million shekels annually, is also being revisited.

To maintain Israel's attractiveness, the Finance Ministry plans additional measures, including defining AI income taxation, clarifying tax deduction mechanisms for international dealings to prevent double taxation, and leveraging investment incentive laws. The team emphasizes avoiding taxation exceeding global norms under Pillar 2 and completely refraining from specific taxes on AI inputs like robots and computing. Other proposed measures include a favorable business environment, regulatory easing, and access to advanced infrastructure and human capital. Additionally, the ministry is considering fees and taxes for limited resources like energy and land for server farms, aiming to incentivize the registration of intellectual property and companies in Israel.