When I studied economics around the time Americans elected their first septuagenarian president, everything was made to look simple. After decades of the complex world according to John Maynard Keynes,  Milton Friedman dug up an old equation of Irving Fisher, and Monetarism and its Rational Expectations offshoot were launched at the inflation-tired leaders of the world, convincing them  that all they had to do was hold tight to the rudder, and the ship of state would sail towards an economic paradise.

Forty years on, and we’re not only living with the reincarnation of Lord Keynes, but the Nobel Committee for Economics has been liberally sprinkling the prize in its gift on mathematicians  like Robert Aumann and psychologists like Daniel Kahneman. Game Theory and Behavioral Economics, all not of a sudden, have extended the borders of the discipline of Economics, and made it that much more complicated.

Perhaps fortuitously, tax has never made it into the intellectual big league. Despite its central position in the economies of every country in the world, tax has never really played an independent role in macroeconomic theory – it is the (1-t) in every important equation, unless swept aside completely by the dogma of ‘tax neutrality’ (tax should not affect economic decisions).

Tax being condemned to the intellectual wilderness may have been a blessing in disguise when the world woke up five years ago to the pressing need for reform of the international tax system. Unfettered by seriously convincing theories, the OECD – in concert with an ever-expanding number of countries – managed to come up with a series of practical proposals (it is still, in parts,  a work in progress) to make the international taxation scene ‘fairer’ in political , if not philosophical, terms.

In a major supporting role in the Base Erosion and Profit Shifting (BEPS) mini-revolution was the tax add-on of Transfer Pricing – not taxation in the pure sense, but economics-by-numbers, akin to the first past the post political system in such countries as the US and UK – not necessarily fair, but producing a clear result. However, Transfer Pricing needed an overhaul: the simple techniques were backing profits into semi-barren islands in the middle of distant oceans, while even when both parties to a study were functioning nation states, third-world countries were getting the fag-end of profits. As a result,  real people – especially as headcounts – became more important to the transfer pricing calculation.

And then came the Israeli tax authorities. Not satisfied with the potential bounty of other aspects of the BEPS project, they have recently endeavored to go deeper into the (lack of) philosophy behind the transfer pricing  of research and development centers located in Israel. Despite the leading countries of the world being evidently satisfied with such entities paying tax on a cost-plus basis as long as it was to the right address, the authorities  decided to lock horns with some of the world’s leading hi-tech companies, demanding a ‘profit split’ ie a slice of the profits emanating from the intellectual property of the multinationals’ human capital in Israel.

This policy has missed the point at every level: (1) The Israeli authorities are heading for the kind of international disagreement that the BEPS program was specifically designed to avoid, with its stress on international harmony; (2) The Israeli authorities are going to lose; (3) The multinationals may either transfer important human capital abroad, or shift entire operations out of Israel – leading to the loss of many taxpaying jobs; (4) Because of uncertainty, other international companies may be slow to set up operations in Israel.

And all because the Israeli tax authorities spent too much time trying to be clever instead of joining the dots like they were supposed to do. As I learned in my salad days: ‘KEEP IT SIMPLE’.

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