Israel Tax Authority mulls income tax cut

The Ministry of Finance is considering revoking the decision to freeze the linkage of income tax brackets to inflation. Discussions on the matter have been held in recent days.

Israel Tax Authority director Shay Aharonovich addressed this issue publicly earlier this week in his address to the annual real estate conference of the “Zmora” Spatial Planning and Construction Committee, when he said, “Tax collection seems to be in a good place. There is a desire to make things easier for the public. Maybe we will give up on freezing the brackets. I don’t know yet if it will happen because it is a decision of the political echelon.”

It will not impact everyone

To prevent wage erosion due to the increase in the consumer price index (CPI), income tax brackets are linked to the index and updated annually. In the January pay-slip, the ceiling increases in line with inflation and, as a result, less tax is paid to the state.

Israel has seven tax brackets, from 14% income tax at low wage levels (about NIS 7,000 per month) to 50% at high wage levels (about NIS 60,000 per month).

Freezing income tax brackets and credit points for three years was one of the key measures in the 2025 budget. The direct result is an average income tax increase of between 3.5% and 4% each year, according to the inflation rate. At very low wage levels, this is worth just tens of shekels per month to wage earners, at medium wage levels it is worth hundreds of shekels, and at high wage levels it reaches a few thousand shekels per month.

Tax expert Shlomo Feldman CPA says, “The freeze also affected purchase tax brackets, the tax-exempt amounts under the Capital Gains Tax Law, the amount of tax-exempt compensation, and more. There were a number of implications for the freeze, and if it is canceled, it will have a positive effect on everyone.”

He adds, “To the extent that the impact also applies to the 2024 index increase, then of course it will have a greater impact. If they intend to cancel the freeze, then apparently they should cancel both 2024 and 2025, because it makes no sense to cancel only 2025.”

He clarifies that the greatest impact will be on those with high incomes. He explains, “There is a large population in Israel that does not even reach the tax brackets because its income is low, and it will not affect them at all.”

Is there economic justification?

However, it seems that regardless of the discussion about who will benefit most from the lifting of the freeze, the celebrations should be cooled for the time being. “Right now it is not at all clear what will happen, but on the surface it sounds like a decision about elections rather than an economic decision, because there is no economic justification behind the lifting of the freeze. If there was justification for the freeze in 2025, then nothing has changed in the meantime,” says Feldman.

“It is nice that collection has increased and revenues have increased, but expenses have increased by several times compared with collection. In the meantime, the Ministry of Finance has increased the deficit, so it doesn’t look like there will be any cancellations of measures soon.”

Institute of Certified Public Accountants in Israel former president and CPA Stark and Stark managing partner Iris Stark CPA echoes these sentiments and adds, “As long as there is no estimate of the defense budget hike and the war is not expected to end, no substantial decisions can be made. If the war ends soon, it will definitely be possible to cancel the tax freeze as a first step to easing the burden.”

Minister of Finance senior officials confirm that the issue is on the table, but has reservations: “We’re not there yet,” a Ministry of Finance source tells “Globes,” “No one is canceling anything yet, while in the background there are still unresolved budget issues. Canceling the tax freeze is the preferred step if and when it is possible to reduce the burden imposed on the public due to the war. For example, this precedes canceling the VAT increase from our perspective. But we are not yet in the stages of forming the 2026 budget and it is not clear what the defense needs will be due to the ongoing war. We are still in the process of amending the 2025 budget. There is still a way to go before we reach a cut in the burden, but that is the direction.”

The growth paradox

Discussions about canceling measures imposed on the public arose, among other things, due to publication of the Ministry of Finance’s state revenue report for August, which showed that tax collection exceeded the target set.

The flow of cash to the state coffers has recorded impressive and consistent growth. Total state revenues since the start of 2025 totals roughly NIS 367.6 billion, up 16.7% from the corresponding period in 2024. August itself was relatively strong, with revenue of NIS 43.9 billion, compared with NIS 37.4 billion in August 2024.

According to the report, state tax revenue in August rose 11%, compared with August 2024. Collection from direct taxes rose 13% compared with last year, and indirect taxes rose 9%. A particularly big jump in tax collection, of 46%, was recorded in capital market taxation – NIS 1.2 billion this year compared with NIS 800 million in August 2024.

A source at the Tax Authority explains, “The capital market has been really high for several years and continues to rise. A few years ago we were at an average level of about NIS 400 million per month and since 2020 it has been rising (with a few isolated declines in between). It was also high in August 2024 – NIS 800 million and continued to rise in August this year. There is no one clear reason for this, it is also profits on share sells, interest and more.”

Net revenue from real estate taxation was NIS 1.8 billion in August, up 34% from August 2024. The increase in revenue from purchase tax was largely due to a number of large payments for a business building purchase transaction at the end of 2024.

At the Zamora real estate conference, the director of the Tax Authority referred to the increase in state revenue and said, “The growth target has declined. On the other hand, the tax collection target has increased. And this is surprising in the economy because tax collection usually comes with growth. The state is paying a lot of money both to the army reserves and for compensation. About 80% of the money for the reserves returns as consumption, mostly in Israel. It returns as taxes, but it is not reflected in GDP or growth.”

Published by Globes, Israel business news – en.globes.co.il – on September 11, 2025.

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