Israel's Finance Ministry Considers New Taxes Amid AI Revolution

Israel's Ministry of Finance is preparing for the economic impacts of the artificial intelligence (AI) revolution, concerned about potential declines in state tax revenues from labor. To counter this, the ministry is exploring several capital tax increases. These proposals are expected to be presented to the next government, based on the findings of a special task force led by Chief. Shmuel Abramzon.

Ministry officials are worried about a potential gap between job displacement and new job creation, which could lead to higher structural unemployment and a reduced share of labor in the GDP. The report also warns of widening wage gaps and inequality, as productivity gains might concentrate among a small number of highly skilled workers. Globally, the ministry fears a damaged tax base, as Israel relies heavily on R&D centers of major American companies. These companies might reduce their human workforce in favor of AI technologies, thus decreasing local tax collection.

The proposed measures include a property tax on vacant land, intended to encourage residential construction, which could generate approximately 9.5 billion shekels annually. A "Netflix tax" is also under consideration, applying value-added tax (VAT) to foreign companies providing digital services to individual consumers in Israel, estimated to bring in about 500 million shekels per year. Additionally, the ministry is looking at increasing consumption taxes on luxury goods and imposing fees on server farms for their energy and land consumption.

To encourage intellectual property registration within Israel and prevent profit offshoring, tax exemptions and facilities are being considered for patents, software, and algorithms. However, the task force recommended against imposing specific taxes on computing or AI inputs, aiming to maintain Israel's business environment attractiveness and avoid harming technological investments.