Tax Authority Chief Opposes VAT Hike, Favors Lower Income Tax
Translated & summarized from Bizportal by baba
Israel's Tax Authority Director, Shai Aharonovich, opposes raising the Value Added Tax (VAT) and instead proposes reducing income taxes and reforming tax exemptions. He warns of challenging budget years ahead due to increased defense spending, despite strong current tax collection. The authority is developing a long-term plan that could shift the tax burden and is also examining the housing market, including the purchase tax on investment properties. Aharonovich also highlighted the success of the "trapped profits" reform, which has yielded significant revenue.
The story in 6 lines · by baba
- Tax Authority Director Shai Aharonovich opposes further VAT increases, advocating for reduced labor taxes and tax exemption reforms.
- Aharonovich warns of difficult budget years ahead, citing increased defense spending and the need for fiscal caution.
- The Tax Authority is developing a long-term plan to potentially redistribute the tax burden and reform tax credits.
- He expressed reservations about the current purchase tax on investment properties, suggesting a potential reduction.
- Aharonovich noted the success of the "trapped profits" reform, which has generated nearly 10 billion shekels annually.
- He is concerned about a potential future shortage of new apartments due to current slowdowns in construction and land marketing.
The Director of the Tax Authority, Shai Aharonovich, is against further Value Added Tax (VAT) increases and advocates for broader tax system reforms, focusing on reducing taxes on labor income and re-evaluating tax exemptions and benefits. This stance comes amid record tax collection in Israel and a deficit lower than the government's target, though rising defense expenditures and challenging economic years ahead necessitate careful planning. The Tax Authority is developing a plan for the next government, examining changes to tax brackets, tax credit points, and state revenue sources, which could alter the tax burden distribution among employees, self-employed individuals, company owners, and consumers.
Aharonovich stated at a conference in Tel Aviv that 2027 and 2028 could be difficult budget years due to increased defense spending following the October 7th events and the ongoing war, emphasizing the need for fiscal caution despite this year's strong tax collection. He noted that the Tax Authority is preparing a new taxation plan prioritizing long-term solutions over raising existing tax rates. Regarding VAT, which rose from 17% to 18% in early 2025 to fund war expenses, Aharonovich described any further increase as a temporary fix, advocating instead for "structural changes."
While a VAT hike is a quick way to boost state revenue, it carries a significant consumer cost, potentially adding over a thousand shekels annually to a family's expenses. Aharonovich suggests that reforming tax collection from income, capital, and various benefits might be preferable. He highlighted that Israel's marginal tax rates on labor income are relatively high, especially when combined with national insurance and health taxes, impacting many workers. The Tax Authority is exploring ways to redistribute the tax burden, potentially by adjusting tax credit points, which are currently granted based on various criteria like number of children and residency, to more precisely target relief for workers.
Additionally, Aharonovich commented on the housing market, questioning the continuation of the current 8%-10% purchase tax on investment properties beyond its expiration at the end of 2026. He believes a reduction could help re-engage investors but is concerned about a potential future shortage of new apartments due to decreased construction activity and land marketing. The Tax Authority is also reviewing the "trapped profits" reform, which has generated nearly 10 billion shekels annually by taxing undistributed corporate profits, and may consider adjustments based on industry feedback.
