Tax brackets reform to benefit higher earners

During discussions this week about the Economic Arrangements Law, details were revealed about who will benefit from the tax bracket reform for salaried employees being promoted by the Ministry of Finance. The aim is to increase the net salary taken home by employees by reducing the income tax rate in higher-than-average salary brackets.

In Israel, there are currently seven income tax brackets: starting from 10% income tax at low salary levels and up to 50% at high salary levels. Currently, a tax rate of 20% applies to those earning NIS 10,000-16,000, and it is proposed to expand the bracket so that it also includes those earning up to NIS 19,000. In addition, the next tax bracket will also be expanded, and the one after it will increase accordingly.

The bill explains that this is a distortion that requires correction even in relation to the OECD average, since those who currently earn a medium salary very quickly reach high income tax brackets in addition to National Insurance payments. The reform will result in a loss of NIS 5 billion in taxes each year to the state coffers.

Who will gain from the tax benefits?

During discussions in the Knesset Finance Committee, the Ministry of Finance presented an analysis by MK Orit Farkash Hacohen (National Unity) on who will benefit from the tax bracket changes.

Firstly are those in the top eighth to tenth income deciles. Second, 64% of those benefiting from the tax break are aged between 35 and 55, compared with less than 50% among the working population who will not benefit from it. Thirdly, 66% of those benefiting from the tax break are parents of children, compared with 38% among workers, who will not benefit from it. It was also found that 53% of the beneficiaries live in the Tel Aviv and Central districts, compared with 40% of the population that will not benefit from the change. Finally, most of the beneficiaries of the tax reduction are salaried employees – 92%.

This is a benefit to the public that does not generate widespread opposition in the Knesset, unlike other reforms promoted by the Ministry of Finance, but questions nevertheless arose. For example, the Ministry of Finance was asked why the margin should not be applied to lower tax brackets to increase the number of eligible people. The response was that there would be a negligible benefit of about NIS 75 on average per month. MKs requested a breakdown of the eligible people in order to understand whether the average reflects large gaps or not, but this data has not yet been provided.

Another issue concerned one of the key decrees in the previous budget, when the tax brackets and credit points were frozen for three years, so that in practice the tax increased between 3%-4%. Therefore, the Ministry of Finance was asked why the freeze that increased the tax was not canceled, which is now being reduced.

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In response, the Ministry of Finance focused on the argument that changing the marginal tax (the tax on the highest level of a worker’s salary) would incentivize work, while the other proposals would increase the effective tax (the average tax that workers pay on their salary). It was also noted that these three deciles are the ones who pay 95% of income tax and that “this is not a fair system.”

The issue of funding the reform

Beyond the issue of tax policy, a much more serious issue hangs over this reform – the issue of financing. The Economic Arrangements Law stipulates that the reform is conditional on imposing a property tax on vacant land, a tax that was in effect in the past and has been repealed. This tax is expected to bring the state coffers about NIS 8 billion over four years, the Ministry of Finance estimates.

The Knesset’s legal department issued an opinion this week stating that it was right to discuss the law outside the framework of the Economic Arrangements Law and that gaps in the collection process that caused the tax to be frozen 20 years ago remain and that the current proposal does not bridge them. The discussion heard objections from most MKs and representatives of contractors and developers.

Finance Committee Chairman MK Hanoch Milwidsky (Likud) said, “It will be challenging to move forward with the current wording” and recommended that the Ministry of Finance come back with a new proposal. The Ministry of Finance claims that they will withdraw the proposal to widen tax brackets even if the Finance Committee empties the budget source for benefits, but it is difficult to see this being possible in an election year.

In any case, even if the property tax goes into effect, a gap will be created in revenues versus expenditures, at least initially, because the expenditure on widening tax brackets is immediate, and the accrual of revenues from property taxes is gradual. The Ministry of Finance explained where the budget will come from in the meantime: the fiscal deficit, which according to the budget proposal will be 3.9% of GDP; a rate that does not lead to an increase in the debt-to-GDP ratio, but does not reduce it after the war years either.

These are not the only tax benefits currently being promoted in the Knesset. The Minister of Finance is delaying the introduction of the bill for credit points for the city of Ashkelon until a private bill submitted by MK Zvi Sukkot to increase tax benefits for endangered localities in Judea and Samaria is discussed. The proposal was discussed in the Knesset this week and aroused wall to wall opposition from officials. The Budget Division noted that it would cost NIS 450 million a year without having a budgetary source, and that the tax benefits do not encourage additional residents.

The Knesset’s legal advisor raised many legal difficulties, including the violation of the value of equality, when for the first time tax benefits are being given based on criteria that do not refer to the entire country, but only to Judea and Samaria. The Ministry of Justice added that the criteria are based on a security-classified and non-transparent ranking. The Ministry of Finance’s legal advisor added that the justification for singling out Judea and Samaria compared with other endangered localities in Israel is unclear.

Published by Globes, Israel business news – en.globes.co.il – on February 26, 2026.

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