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 potential economic repercussions of artificial intelligence (AI), particularly its impact on state tax revenues. A special team, led by Chief Economist Dr. Shmuel Abramzon, has drafted proposals focusing on increasing taxes on capital, luxury goods, and vacant land, while opposing a specific tax on robots and computing power. The ministry is preparing for the AI era, anticipating a decline in tax income and suggesting measures to bolster revenue from capital gains. Among the proposals are a property tax on vacant land, taxation on luxury consumption, and improved enforcement of VAT collection on digital services provided by foreign entities to Israeli consumers, a measure sometimes referred to as a "Netflix tax."

The ministry's concerns stem from the uncertainty surrounding AI's effects on employment and the economy. While historical technological revolutions have boosted productivity without mass unemployment, AI presents a unique challenge. The Treasury is particularly worried about the gap between job displacement and new job creation, with scenarios ranging from minimal disruption to structural unemployment and wealth concentration. Even if a long-term equilibrium is reached, the transition period could see rising unemployment rates.

Experts largely agree that the share of labor in national output is expected to decrease, at least in the short to medium term. This trend is already evident in Israel and other countries. Another point of debate is whether AI will lead to overall economic growth or create "good enough" technologies that replace workers without significantly boosting productivity. The proposals also address the potential widening of income inequality, as the benefits of productivity gains may accrue to highly skilled and educated workers. This inequality could also manifest between nations, with large firms controlling AI intellectual property concentrated in the US and China.

To mitigate these challenges, the Treasury suggests several policy directions. These include maintaining the tax base by increasing taxes on capital, though caution is advised to avoid negatively impacting investments. A prominent example is taxing vacant land to incentivize construction, a measure previously considered to address war expenses and estimated to generate billions annually. The ministry also proposes enhancing consumption taxes, including luxury goods and digital services from foreign providers, potentially reviving the "Netflix tax" proposal which could yield significant revenue.

Furthermore, the Finance Ministry plans initiatives to preserve Israel's attractiveness in the global market. This involves defining and taxing AI-related income, clarifying tax deduction mechanisms for international dealings to prevent double taxation, and examining how investment incentive laws can support the AI industry. The team emphasizes not taxing companies more than globally accepted rates under Pillar 2 and completely avoiding specific taxes on AI inputs like robots and computing. Other measures include fostering a favorable business environment, easing regulations, and providing access to advanced infrastructure and human capital.