Israel Faces Potential Tax Hikes and Economic Measures Post-Election
Translated & summarized from Makor Rishon by baba
Following the upcoming elections, Israel is bracing for potential economic austerity measures and tax increases, regardless of the government formed. The Ministry of Finance has compiled a list of potential "decrees" to address rising defense and reconstruction costs, including proposals for higher capital taxes, reduced pension tax benefits, and the reinstatement of property tax on vacant land. Other considerations involve mandatory reporting of rental income and the reintroduction of fuel excise taxes, alongside a potential VAT on foreign digital services.
The story in 5 lines · by baba
- Israel anticipates potential tax hikes and economic austerity measures post-election to cover rising costs.
- Proposals include increasing capital taxes, reducing pension tax benefits, and taxing vacant land.
- A mandatory reporting system for rental income and reinstatement of fuel excise taxes are also considered.
- The impact of artificial intelligence on the labor tax base is a growing concern for the Finance Ministry.
- A "Netflix tax" on foreign digital services for Israeli consumers is under consideration.
Regardless of the election outcome, Israelis are likely to face a series of economic measures and potential tax increases once a new government is formed. Ministry of Finance and Tax Authority officials have prepared a list of possible "decrees" to address the nation's financial needs, driven by increased defense spending, war costs, and civil reconstruction efforts, which collectively add tens of billions of shekels annually. The government aims to avoid increasing the deficit and accumulating further debt.
One significant challenge is the impact of artificial intelligence on state revenue. A recent Finance Ministry report highlights concerns about AI potentially eroding the tax base on labor, as payments for services might shift to providers outside Israel. To counter this, the ministry is considering increasing taxes on capital rather than income, while being cautious about negative effects on investment.
Proposed measures include reducing tax benefits on savings, such as lowering pension and study fund contributions. The argument is that current large contributions strain households, and many retirees already have sufficient funds. Reducing these contributions would increase net income, boost consumption and growth, and lessen the need for extensive tax breaks on savings, offering a dual benefit.
Another proposal is to reinstate property tax on vacant land designated for construction, a tax that was frozen in 2000. This tax would apply to the mere ownership of such land, aiming to encourage its use and address the rise in value of undeveloped land due to public infrastructure projects. The estimated value of land subject to this tax is around 800 billion shekels, with about 63% owned by companies. A 1.5% annual tax on vacant land value could generate nearly 10 billion shekels yearly.
Additionally, the government is considering mandating reporting for all rental income, even amounts currently exempt from tax. This aims to curb tax evasion in the rental market, estimated to involve 3 billion shekels annually. A national registry of rentals is also being discussed. The restoration of fuel excise taxes, reduced earlier to mitigate rising gasoline prices, is also anticipated immediately after the elections, which would likely cause fuel prices to surge.
Finally, a "Netflix tax" is being examined, which would impose VAT on digital services provided by foreign companies to Israeli consumers. Currently, Israeli businesses pay VAT on such services, while foreign competitors do not. This measure, estimated to generate hundreds of millions of shekels, would likely be passed on to consumers. The proposal was previously considered but rejected.
