Monday, July 13, 2009

"In five or six years, Israel’s company tax will be lower than Ireland’s.Intel and others will think hard about that when they decide where to invest"

Who else spotted this remark about Ireland's taxes in an article about Israel in the Economist this week?

Surprisingly, Mr Steinitz [Yuval Steinitz , Israel’s finance minister] has raised VAT from 15.5% to 16.5% (but had to drop a proposal to levy it on fruit and vegetables), while embarking on a seven-year plan gradually to reduce company tax and income tax instead. “If I put money in ordinary peoples’ pockets, they’ll spend it on imported goods and foreign holidays,” he says. “Our own economy doesn’t produce consumer goods for them to buy. We make know-how and software, chips for Intel [a giant American maker of processors] and computers for irrigation, chemicals, stents for heart surgery and pilotless drones.”

Mr Steinitz says Israel must make such products more competitive as the world economy recovers. He proposes to double government funding for research and development. No bank bail-outs, he argues, means he can keep the budget deficit down to 6% this year and 5.5% next. His “temporary” rise in VAT is meant to help offset a drop in tax revenue. “Other countries will be raising their direct taxes to cover their deficits just when our taxes will be coming down. In five or six years, Israel’s company tax will be lower than Ireland’s. Intel and others will think hard about that when they decide where to invest.”

Sounds very smart. Raising VAT does not hit Israeli industry because most of its consumer goods are imported. Ireland also imports most consumer goods, but the Republic of Ireland government has less leeway for raising VAT because people can (and do) go across the border to Northern Ireland if goods are too expensive in the Republic. Israel doesn't have the same issue (it is not like people will go across the border to Syria for cheap groceries).

Also, Ireland has the issue of paying for its reckless banks. Israel does not have this problem.

I've spoken to Irish government officials who often look to Israel as a country to learn from and emulate. But, in this case, it seems to me that it's the other way around: Israel is emulating Ireland's strategy coming out of the 1980s recession: Lower taxes and invest in R&D. Ireland, by contrast, is considering raising taxes. But R&D investment continues in Ireland: Just in the past week we have: 1.5m Euro investment by telecoms software company Accuris, 11m Euro investment by Pfizer into Cork, and 22m Euro by Boston Scientific to be invested in R&D in Ireland. Many of that R&D is on the back of the existing low-tax climate in Ireland. My advice to the Irish government is to leave corporate taxes as they are, and in general keep taxes low. I don't think Ireland wants a situation where companies choose to locate R&D in Israel instead of Ireland, when Israel itself is emulating the Irish model which brought the companies to Ireland in the first place.

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