Thursday, March 19, 2015

U.S. Economic Support to Israel

The U.S. Congressional Research Service last year published "U.S. Foreign Aid to Israel". I quote from the summary:
Israel is the largest cumulative recipient of U.S. foreign assistance since World War II. To date, the United States has provided Israel $121 billion (current, or non-inflation-adjusted, dollars) in bilateral assistance. Almost all U.S. bilateral aid to Israel is in the form of military assistance, although in the past Israel also received significant economic assistance. Strong congressional support for Israel has resulted in Israel receiving benefits not available to any other countries; for example, Israel can use some U.S. military assistance both for research and development in the United States and for military purchases from Israeli manufacturers. In addition, U.S. assistance earmarked for Israel is generally delivered in the first 30 days of the fiscal year, while most other recipients normally receive aid in installments, and Israel (as is also the case with Egypt) is permitted to use cash flow financing for its U.S. arms purchases. In addition to receiving U.S. State Department-administered foreign assistance, Israel also receives funds from annual defense appropriations bills for rocket and missile defense programs. Israel pursues some of those programs jointly with the United States. 
In 2007, the Bush Administration and the Israeli government agreed to a 10-year, $30 billion military aid package for the period from FY2009 to FY2018. During his March 2013 visit to Israel, President Obama pledged that the United States would continue to provide Israel with multi-year commitments of military aid subject to the approval of Congress. 
The FY2014 Consolidated Appropriations Act (P.L. 113-76) provides the President’s full $3.1 billion request in FMF for Israel. In addition, it provides another $504 million in funding for research, development, and production of Israel’s Iron Dome anti-rocket system ($235 million) and of the joint U.S.-Israel missile defense systems David’s Sling ($149.7 million), the Arrow improvement program (or Arrow II, $44.3 million), and Arrow III ($74.7 million). 
For FY2015, the Administration is requesting $3.1 billion in FMF to Israel and $10 million in Migration and Refugee Assistance. The Missile Defense Agency’s FY2015 request for joint U.S.-Israeli programs is $96.8 million. The Administration also is requesting $175.9 million for Iron Dome. 
The sum of the foreign aid contributions since the creation of Israel in the 1940s underestimates the real value of that assistance. For example, if the United States had provided $3 billion per year for 40 years the total would be $120 billion. If instead, the United States had invested $3 billion per year for 40 years obtaining 5% growth on total investment per year, the net value at the end of that period would be just under $294 billion.

According to the CIA's World Factbook:
  • The population of Israel is 7,821,850
  • The GDP of Israel is $272.7 billion (2013 est.)
  • The per capita GDP of Israel is $36,200 (2013 est.)
The average Israeli family has 3.72 members. Thus the per family GDP is $134,664. This is not the same as the per family income, but the point is made that Israel is not a poor country, and on average its families are not poor. The proposed U.S. aid to Israel for 2015 would not greatly increase the income of its people.

It should be noted that the United States provides aid to other countries in support of Israel. Thus is has provided large amounts of aid to Egypt as part of the deal leading to a peace treaty between Israel and Egypt. So too, it has provided aid to Jordan at a level that is justified by the importance of peaceful relations between Jordan and Israel.

Since 1992, the U.S. has offered Israel an additional $2 billion annually in loan guarantees. Congressional researchers have disclosed that between 1974 and 1989, $16.4 billion in U.S. military loans were converted to grants and that this was the understanding from the beginning. Indeed, all past U.S. loans to Israel have eventually been forgiven by Congress, which has undoubtedly helped Israel's often-touted claim that they have never defaulted on a U.S. government loan. U.S. policy since 1984 has been that economic assistance to Israel must equal or exceed Israel's annual debt repayment to the United States....... 
In addition, there is the more than $1.5 billion in private U.S. funds that go to Israel annually in the form of $1 billion in private tax-deductible donations and $500 million in Israeli bonds. The ability of Americans to make what amounts to tax-deductible contributions to a foreign government, made possible through a number of Jewish charities, does not exist with any other country. Nor do these figures include short- and long-term commercial loans from U.S. banks, which have been as high as $1 billion annually in recent years.
Note that the fact that $1 billion in so-called private donations to Israeli causes means that there is significant tax financing of aid to Israel from the United States. Thus the U.S. government is foregoing tax income that it would otherwise receive by allowing the donors to deduct the donations to Israeli causes from their income.

The United States also has free trade agreements (FTAs) with Israel and Jordan. The FTA with Israel was created in 1985, the first such agreement made by the United States. That agreement
continues to serve as the foundation for expanding trade and investment between the United States and Israel by reducing barriers and promoting regulatory transparency.....(There is also a U.S.-Israel) Agreement Concerning Certain Aspects of Trade in Agricultural Products (ATAP), which provided for duty-free or other preferential treatment of certain agricultural products. 
This agreement has also meant billions of dollars in benefits to the Israeli economy.

There has been an income tax treaty between Israel and the United States since 1975. Here are online copies of the relevant documents. According to the U.S. Internal Revenue Service:
Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.
It is perhaps time to reconsider U.S. foreign aid to Israel. It is less important than it once was to Israel, given Israel's current GDP, and is perhaps not needed given the relatively high per family GDP.  Moreover, there remain other economic advantages that Israel has with respect to U.S. markets and support that are expensive to maintain and of value to Israel.

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