"Participation in boycotts is related inversely to the magnitude of U.S. tax penalties."

The Arab League boycott of Israel has been in effect since 1945, making it one of the longest lasting in modern history. American firms receive approximately 10,000 requests each year to participate in that boycott, the most visible of all on the international scene. The U.S. government requires companies to report all requests to participate in such boycotts. U.S. anti-boycott legislation, passed in 1976, aims at reducing American companies' participation in boycotts of Israel, imposing stiff tax and civil penalties on those that comply. Despite these penalties, American companies report that they comply with approximately 30 percent of such requests.

The Arab League boycott not only presents companies with the choice of doing business either with Arab countries or Israel, it also extends the boycott to companies doing business with supporters of Israel. That prohibition prevents companies from using intermediaries and adds to the cost of doing business with Israel. Of course, there are also costs to the United States in opposing the boycott of Israel, including strained relations with Arab countries, lost economic opportunities, and encouraging opposition to U.S.-led boycotts of countries such as Cuba, China, and North Korea.

Even so, as a strong supporter of Israel, the United States passed anti-boycott legislation in 1976. Penalties for American firms that comply with the boycott include the loss of foreign tax credits, thereby making their effect on companies a function of local tax rates. That fact also provides a way to determine the effectiveness of the 1976 anti-boycott legislation, by measuring compliance as a function of how hard the penalties financially hurt American corporations.

In Taxed Avoidance: American Participation in Unsanctioned International Boycotts(NBER Working Paper No. 6116), Research Associate James Hines examines whether such tax penalties are effective in reducing corporate compliance with boycott requests. He examines the available data from 1977 to 1982 and 1986, which show that most boycott requests are refused and that most companies categorically refuse all requests. However, the evidence also indicates that participation in boycotts is related inversely to the magnitude of U.S. tax penalties. In other words, as foreign tax rates cause a company's bottom line penalties to increase, its likelihood of participating in a boycott decreases. Tax rate differences of 10 percent result in a 6 percent difference in boycott compliance, Hines finds.

The evidence indicates that U.S. anti-boycott legislation is, in fact, effective. It significantly reduces the willingness of American firms to participate in the boycott of Israel, lowering participation rates by between 15 and 30 percent.

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.

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