"The original Law for the Encouragement of Capital Investment, which included trapped profits, was not good. But the new law, which is better, still benefits big companies too much," former deputy governor of the Bank of Israel Prof. Zvi Eckstein told "Globes". He now serves as dean of the School of Economics at the Interdisciplinary Center, Herzliya.
Eckstein, who thoroughly examined the Law for the Encouragement of Capital Investment, said that original law, enacted in 1959 and which was amended in 2009-10, was based on two benefits: subsidies for capital and low taxes. "The conditions for the two components were very complicated and created a lot of uncertainty. There was agreement, based on several studies, that the law was bad and harmful, and it should be amended because it did not help the economy, either in productivity or jobs," he said.
"The amendment two years ago assumed that the companies tax would fall to 18%. Under the old tax structure, the Knesset adopted a companies tax rate of 6% in the periphery and 12% in the rest of the country. On the basis of these tax rates, the tax break was calculated at NIS 5-6 billion, based on the difference between a tax rate of 6% of 12% and 18%. But after the tax structure was cancelled following Trajtenberg, and the companies tax was raised to 25%, the subsidy under the new law because much greater, and this is the main reason why it should be amended and the tax rates raised sharply for the beneficiary companies."
Eckstein also criticized the low tax rate for exporters to prevent them from changing their places of production. "The tax issue is important, especially for exporters of innovative products. On this point, Israel should lead. But the criterion that it is enough to export 25% of production to be eligible for the tax break is very low in my opinion, became a company that exports only 25% of its output is a company that produces for the domestic market and there is no point in subsidizing it," he says.
Eckstein adds, "Exports should not be the only criteria. There should also be criteria of innovation or positive external effect on the economy by adopting technologies or skilled jobs training, which would have long-term effects on the economy."
Eckstein defends the tax breaks granted to Intel Israel Ltd., saying, "The large subsidy given to Intel meets the innovation criterion because of the very strong external effect."
Published by Globes [online], Israel business news - www.globes-online.com - on February 18, 2013
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