Israel Finance Ministry Proposes Tax Cuts for High Earners and Reduced Child Credits
Israel's Ministry of Finance and Tax Authority are preparing recommendations to cut income taxes for high earners earning between 25,000 and 53,000 shekels monthly, while scaling back child credit points and regional tax benefits to offset fiscal costs.
The Ministry of Finance and the Tax Authority are preparing to recommend significant income tax reforms to the incoming government, centered on reducing tax burdens for high earners while scaling back child credit points and regional tax benefits.
The proposals are being formulated by the "Personal Effort Team," one of eight working groups operating under the "Committee of Three." The team includes representatives from the Tax Authority, the Budget Department, and the Chief Economist's Department, with consulting from the Bank of Israel's Research Department. Officials intend to publish the recommendations ahead of the new government's formation to highlight their professional nature.
Targeting Labor Income Tax Brackets
According to a Tax Authority study from November 2025, the tax burden on middle and high-income earners is heavily skewed. While the fifth and sixth deciles contribute modest shares of direct taxes, the highest deciles—particularly percentiles 85 to 98, whose monthly labor income ranges between 25,000 and 53,000 shekels—face exceptionally high tax rates by international comparison.
A complementary study published by the Bank of Israel in June 2026 confirmed this finding, noting that Israel's 10th decile pays higher taxes internationally when including indirect taxes like VAT. Ministry of Finance officials argue that the current tax structure discourages career advancement and higher labor productivity.
Carrot and Stick Approach
To address this, the proposed reforms suggest pushing off the entry points for the 31% and 35% tax brackets, thereby lowering taxes on middle-to-high labor incomes. However, because these tax cuts carry a heavy fiscal cost—building on previous adjustments that cost approximately 5 billion shekels and pushing total tax expenditures higher—the Ministry intends to introduce offsetting measures.
The proposed offsets include scaling back child credit points, which were originally introduced to encourage women's labor participation but have grown into a 14.5 billion shekel annual state expenditure. Additionally, the ministry aims to reform regional tax benefits, which cost roughly 2.8 billion shekels annually and are viewed by economists as politically motivated rather than professionally justified.
While senior treasury officials acknowledge that significantly cutting child credits or regional benefits faces steep political hurdles, they emphasize the necessity of highlighting systemic tax distortions. The Ministry of Finance declined to detail specific ongoing policies, stating that conclusions will be published for public comment once finalized.
