Israel Considers Tax Cuts for High Earners, Cuts to Child and Location Benefits
Translated & summarized from Calcalist by baba
Israel's Ministry of Finance and Tax Authority are proposing significant income tax changes, including lower taxes for high earners and reduced benefits for children and residential locations. These recommendations, intended to be non-partisan, aim to boost work incentives by adjusting tax brackets and cutting credits. The proposals face political uncertainty regarding adoption by the next government, despite data suggesting high tax burdens on top earners internationally.
The story in 6 lines · by baba
- Israel's Finance Ministry and Tax Authority propose cutting income tax for high earners.
- Proposed changes include reducing tax credits for children and location-based benefits.
- The goal is to increase incentives for work and career advancement.
- High earners currently face a proportionally higher tax burden compared to their income share.
- International comparisons suggest Israel's top earners pay more taxes than in many other countries.
- The success of these proposals depends on the political composition of the next government.
Israel's Ministry of Finance and Tax Authority are reportedly preparing recommendations for the incoming government that would significantly alter income tax. The primary proposal involves reducing income tax for high earners in the ninth and tenth deciles (earning between approximately NIS 25,000 and NIS 53,000 monthly). This reduction would be funded by decreasing tax credit points, particularly those given to parents for children, and by cutting tax benefits for residential locations.
The recommendations are expected within weeks, before a new government is formed, to present them as professional, non-partisan proposals. These ideas stem from an internal "Personal Effort Team" composed of representatives from the Tax Authority, the Budget Department, and the Chief Economist's office at the Finance Ministry, with some consultation from the Bank of Israel's research department.
While not a radical shift, the proposals reflect a long-standing view among these bodies that tax benefits for locations and children are excessive, while the tax burden on the highest earners is too high and discourages career advancement. The Finance Ministry aims to reform taxes, but the adoption of these recommendations depends heavily on the political makeup of the next government.
Data suggests that while middle-income earners (deciles 3-8) pay a lower percentage of direct taxes than their share of national income, the highest deciles pay a proportionally higher share. However, a Bank of Israel study indicated that Israel's top decile pays more taxes internationally, even when including indirect taxes. Internal analyses by the "Personal Effort Team" suggest that deciles 85-98 face excessively high progressivity compared to international standards.
The current system has seen tax brackets shift, with entry points for higher tax rates moving up in 2026, effectively providing a tax break for those earning over NIS 25,000. The proposed changes aim to further delay entry into the 31% and 35% tax brackets. The "carrot" of lower income tax rates is paired with the "stick" of reducing child tax credits, which cost an estimated NIS 14.5 billion in 2026, and reforming location-based tax benefits, costing approximately NIS 2.8 billion annually.
Finance Ministry officials acknowledge that significantly reducing child tax credits or location benefits is unlikely but believe highlighting these specific benefits demonstrates how they contribute to higher overall tax rates. They argue the current tax system insufficiently incentivizes work and that the proposed changes would encourage career progression.
