Israel is preparing a major tax overhaul. The question is who will pay
The Finance Ministry is reviewing inheritance taxes, property taxes, income tax brackets and long-standing exemptions as it prepares proposals for the next government. Officials say the goal is not simply to raise revenue, but to rebalance the tax burden and protect economic growth.
It has been hard to miss the flood of tax headlines in recent weeks. One day brings a report on inheritance tax, another on property tax, and another on taxing study funds. In fact, these stories all stem from the same initiative. In recent months, the Finance Ministry has established an internal committee to conduct a comprehensive review of Israel’s tax system. The committee is headed by Tax Authority Director Shai Aharonovich, Budget Division head Mehran Prozenfer and Chief Economist Shmuel Abramzon.
The reasons for setting up the committee can be described as a combination of opportunity, necessity and lessons learned. The opportunity is that Israel is approaching an election. It is not yet known who the next finance minister will be, but new governments often have an opportunity to push through significant reforms early in their terms. There is also a practical consideration. In a normal year, the Finance Ministry would be under pressure at this stage to prepare the budget. But work on the 2027 budget cannot yet proceed as usual, giving the ministry more room to examine the tax system in depth.
The necessity behind the committee is primarily fiscal. Defense spending, interest payments and reconstruction costs are expected to weigh on the economy for decades, while Israel needs to bring its deficit under control and reduce its debt-to-GDP ratio. Yet some senior Finance Ministry officials caution against viewing the exercise solely as a drive to raise revenue. Government revenues have repeatedly exceeded expectations, they argue, and it may be possible to manage the fiscal situation without raising taxes.
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Tax Authority Director Shai Aharonovich.
(Photo: Avichai Socher, Ministry of Finance)
In their view, the need for reform is also rooted in a belief that the current tax system is unfair. It places too much of the burden on the middle class while doing too little to encourage growth in the sectors that drive the economy.
Cutting exemptions
That brings us to the third factor: lessons learned. There is frustration within the Finance Ministry over the tax package passed ahead of the 2025 budget. The state clearly needed additional revenue, but officials believe the measures were not designed as effectively as they could have been. Income tax on working people was increased, the implications of the trapped-profits reform were not fully examined, and unnecessary tax exemptions were left in place.
The ministry’s assessment is that better preparation could have produced a smarter package. This time, officials believe, they can be ready before the next government takes office. Rather than waiting for the incoming finance minister to demand measures for the 2027 budget, they hope to present a comprehensive package from the outset, combining incentives and penalties with a clear rationale and a stronger case for implementation.
That is the theory. In practice, the ministry’s teams have yet to reach final conclusions, and any proposals they produce are likely to change repeatedly. A new finance minister will have their own priorities. Public debate will reshape the proposals, and the legislative process in the Knesset will bring further changes.
Still, the ministry’s thinking is that a comprehensive package, backed by a coherent policy framework, a combination of incentives and penalties, and a clear explanation of the national need, will have a better chance of changing a tax system that has remained largely unchanged in important respects for years.
Although the review is ongoing, several directions are already emerging. The ministry gave serious consideration to inheritance and estate taxes, but the idea now appears to have been dropped. At this stage, officials broadly agree that the committee is unlikely to recommend such a tax.
The ministry is more firmly behind widening income tax brackets to ease the burden on middle- and upper-income earners. The 31% bracket is likely to be widened, meaning that taxpayers would have to earn more than they do today to enter it. Currently, the threshold is a monthly income of NIS 19,000.
At the same time, the ministry’s teams believe the tax benefits granted to parents through child tax credit points should be reduced.
The committee is also considering eliminating exemptions. One example is VAT on imported services, commonly associated with the so-called “Netflix tax.” The term refers to digital services consumed in Israel for which VAT is not currently collected in the same way as on many domestic purchases.
Other exemptions the ministry would like to revisit include those applying to tourism, fruits and vegetables, and the VAT exemption in Eilat. Whether any of these proposals advance will depend heavily on the political balance of power.
The committee is also considering narrowing the tax benefits available through study funds. The proposal under discussion would limit the exemption on capital gains to the first six years of a fund’s life, reviving an idea raised in the past.
Taxing sources beyond labor
A document published a week and a half ago by the Chief Economist offers further insight into the committee’s thinking. It examines the implications of artificial intelligence for taxation. Abramzon argues against taxing AI consumption, but calls for greater consideration of revenue sources beyond taxes on labor, given the possibility that AI could reduce the share of the population in work.
In particular, the document again raises the idea of taxing vacant land through a property tax. The proposal was a priority for Finance Minister Bezalel Smotrich in the 2026 budget, but was removed from the agenda following political pressure amid Operation Roaring Lion. Other Finance Ministry officials continue to support the tax, making it a potential component of the 2027 budget.
Beyond the broader argument for shifting some of the tax burden from labor to capital, the Chief Economist’s document also recommends taxing consumption. Initially, it does not call for raising VAT, instead advocating the closure of the exemptions described above. It also raises the possibility of taxing luxury goods, likely through a purchase-tax mechanism.
The document’s central message is that Israel needs to examine whether its tax system can preserve the country’s competitiveness and attractiveness as a place to do business, particularly in high-tech. That helps explain the proposal for a substantial tax benefit for high-tech entrepreneurs under the U.S.-style Qualified Small Business Stock (QSBS) model, reported here yesterday. It also helps explain the frustration within the Finance Ministry over reports that the government may tighten the tax regime for the high-tech sector.
The challenge for the ministry is to reconcile these competing objectives: raising revenue to meet long-term fiscal needs, distributing the tax burden more fairly, and ensuring that the tax system does not undermine the economic growth it is supposed to support.
