Israel's Finance Ministry Proposes Income Tax Cuts for High Earners

Israel's Ministry of Finance and Tax Authority are preparing recommendations for the next government that would reduce income taxes for high-earning Israelis. These proposals, expected to be published in the coming weeks before a new government is formed, aim to demonstrate that the suggestions are based on professional calculations independent of future coalition politics. The primary beneficiaries would be individuals earning between 25,000 and 53,000 shekels gross per month, a group that includes many in the tech sector, doctors, and engineers, representing the ninth and tenth income deciles. Experts argue this segment of the population faces a disproportionately high tax burden compared to similar groups internationally. The proposals suggest that these tax reductions would be offset by cuts to child tax credits and benefits for residents of specific localities.

Officials from the Finance Ministry, Tax Authority, and Bank of Israel have long believed that the tax load on high earners discourages career advancement. Research indicates that the top 20% of earners, comprising the ninth and tenth deciles, contribute a larger percentage of total tax revenue than their share of the national income. For instance, while the fifth decile earns 5.2% of the economy's income, its members pay only 1.6% of taxes. Although progressive taxation dictates higher earners pay more, a Bank of Israel study from June 2026, considering indirect taxes, found Israel's top decile faces a higher tax burden than in other countries. Internal calculations by a working group reportedly confirm this, specifically for those earning between 25,000 and 53,000 shekels monthly.

The current tax structure in 2026 imposes a 31% rate on income above 19,000 shekels, a 35% rate above 25,000 shekels, and a 47% rate above 47,000 shekels. The Ministry of Finance and Tax Authority aim to further reduce taxes on labor income, potentially by raising the thresholds for the 31% and 35% tax brackets, which would also benefit those with even higher salaries. The exact formula is still under consideration, with attention focused on these mid-to-high income brackets rather than necessarily lowering the top 47% rate.

To compensate for the proposed tax cuts, the Finance Ministry intends to recommend reducing existing benefits. The most significant proposed cut is to child tax credits, which cost the state 14.5 billion shekels in 2026 and were initially intended to encourage women's workforce participation. Additionally, reforms to tax benefits for residents of certain localities, estimated to cost 2.8 billion shekels annually, are being considered, with officials noting these benefits are often politically motivated rather than professionally justified. Despite acknowledging the low probability of significantly cutting child tax credits or locality benefits, officials want to link these targeted benefits to the necessity of maintaining higher overall tax rates.

The Finance Ministry stated that an internal working group is indeed examining taxation issues but declined to comment further as policy is still being formulated. Findings will be published for public comment once finalized.