New surtax targets Israel’s wealthiest

Families in the top 0.01% of wealth in Israel will pay an average of NIS 300,000 more in additional tax in 2025, according to calculations based on Finance Ministry projections for a new law, which took effect on January 1 and seeks to expand tax collection from the wealthy.

While the Ministry of Finance seeks to reach into the pockets of the general population, in an attempt to narrow the budget deficit caused by the war, by freezing income tax brackets and credit points, increasing National Insurance contributions, and collecting one leisure day from each employee’s salary, these measures are not progressive and have no merit. Almost no effect on the wealthy.

About 2,500 families, which make up the top 0.01% of Israel’s population, each earn more than NIS 20 million annually, about 90% of their income coming from passive income. In other words, not from labor wages but from dividends, real estate dividends, investments in securities, income from rentals, and the like. Therefore, the new additional tax rate targeting the wealthy focuses on income from capital and not from wages.

The surtax was introduced following the 2011 cost of living protests, taxing annual per capita income over NIS 721,560 at a rate of 3%. The new amendment imposes an additional tax of 2%, but according to a slightly different model, as only passive income that exceeds the annual ceiling will be taxed.

This is in contrast to the current situation, where the surtax applies to all of an individual’s taxable income, both personal income from work and passive income.

Eric Benishai, tax partner at PwC in Israel and head of the tax group, explains the new tax with the following simulation: “For example, an individual has an annual income of NIS 600,000 from salary, and another NIS 200,000 from dividends for a total of NIS 800,000. The new shekel will only be subject to the “old” additional tax of 3%, because it exceeded the annual ceiling of the old additional tax, but not the annual ceiling of the additional tax, with Only 200,000 shekels of passive income, out of a minimum of 721,560 shekels.

Aside from the Ministry of Finance’s urgent need to narrow the deficit, the rationale behind the change in the additional tax legislation lies in the large gaps in income distribution in the Israeli economy. Data presented to the Knesset Finance Committee reveals an interesting picture: Of the capital income of about NIS 120 billion in 2021, the top 1% received NIS 86 billion, more than 70%.

The Ministry of Finance’s numbers speak for themselves. The new additional tax will apply to about 27,000 families, with 99% of the tax paid by the top 0.1% of Israelis, or about 20,000 families. Furthermore, 75% of the tax will be paid by just the top 0.01% of income – roughly 2,500 households.

Data provided by the Ministry of Finance to the Knesset reveal a large gap: while the effective tax on the income of the top 0.01% is 26%, and for the rest of the population it is 23%, 90% of the income of the top 0.01% is in income. It comes from capital.

This means that a significant portion of the income of the top 0.01% is taxed at lower rates compared to those with less income from work.

According to Finance Ministry projections, the change in the additional tax is expected to add significantly to state revenues: about NIS 1 billion in 2025, and about NIS 1.5 billion every year after that.

Another part of the law, which was divided by the Finance Committee, concerns the imposition of taxes on apartments designated for investment, and is supposed to add about 420 million additional shekels to the state treasury annually.

Published by Globes, Israel Business News – en.globes.co.il – on January 1, 2025

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