Government's Tax Policy Creates Winners and Losers
Translated & summarized from Calcalist by baba
The Israeli government's tax policy has created a complex landscape of benefits and burdens for its citizens. While working parents with young children have seen some financial gains through tax credits and bracket expansions, individuals without young children, the self-employed, and low-income workers have faced net losses due to indirect tax hikes and frozen tax brackets. The recent increase in VAT to 18% has further impacted disposable income across the board, leaving most Israelis with little to no real financial improvement.
The story in 5 lines · by baba
- Government tax policy created winners among families with young children and losers among those without.
- Working parents with young children received tax credits, primarily benefiting middle and higher incomes.
- Indirect tax increases occurred through frozen tax brackets and higher National Insurance contributions.
- The VAT rate increased to 18% in early 2025, impacting all households' disposable income.
- Low-income workers and the self-employed experienced net financial losses from the policy changes.
The Israeli government's tax policy has been characterized by a series of zigzagging maneuvers, offering benefits with one hand while imposing burdens with the other. Initially, the government expanded tax benefits, then reduced others, and in its final year, reintroduced further relief. While some of these shifts were necessitated by wartime budget cuts, a significant portion is attributed to populist policies by Finance Minister Bezalel Smotrich, which have squeezed working citizens.
The policy unfolded in three stages. In the first stage (2024), tax breaks were introduced for working parents with young children, offering up to 5,808 shekels annually per child. However, this benefit primarily aided middle and higher-income earners, as those with lower incomes already paid little to no income tax and thus could not fully utilize the credit.
The second stage (2025) saw indirect tax increases through the freezing of income tax brackets and credit point values, disconnecting them from the consumer price index. This, combined with increased National Insurance contributions, effectively raised the tax burden without explicit tax hikes, a move described by the IMF as a "politically convenient way to secretly raise real taxes." This disproportionately affected individuals without young children and the self-employed.
In the third stage (2026), instead of reversing the freezes, the government widened certain income tax brackets, offering relief of up to 420 shekels per month. This move was designed to provide a visible tax cut, but its full benefit was only accessible to those earning at least 25,100 shekels monthly.
Overall, the analysis indicates that middle and upper-middle-class families with young children have seen a net gain, largely due to the combined benefits of the initial child tax credits and the later bracket expansion. Conversely, individuals without young children and the self-employed have experienced net losses. Low-income workers, earning around 7,500 shekels, have also suffered losses due to increased National Insurance contributions and the freezing of lower tax brackets, while not benefiting from the other measures. The significant increase in VAT to 18% in early 2025 further erodes disposable income for all households, exacerbating the losses for lower and middle-income groups and diminishing the gains for others. The government's convoluted tax policy has left the majority of the public with no significant real improvement in their financial situation, and in many cases, with a substantial reduction in their purchasing power.