Treasury plans higher tax on Israel’s wealthiest

As part of its plans to manage the fiscal deficit in 2025, the Ministry of Finance proposes to increase the additional tax on passive income such as interest. The Ministry proposes to raise the additional tax from its current rate of 3% to 5%, and expand it to include those who have more than one home. Such a move would mainly affect the top 10% of income, but would also be a factor hindering capital investment by Israelis in general.

Currently, annual passive income in excess of NIS 721,560 is subject to additional tax. This includes capital gains, interest and dividends, but not income from employment or business.

The Ministry of Finance confirms that it is not talking about a cumulative addition to the regular income tax, but rather about a tax on people whose passive income is higher than the specified amount. “If an individual has income from capital sources of up to NIS 500,000 and taxable income from work or business of an additional NIS 500,000, the proposed additional tax will not apply, because the taxable income from capital sources is less than the specified limit,” the Ministry explains. Finance.

According to the ministry, the proposed measure is a correction of the regressive side of the current tax system, since most taxes on passive income in Israel are lower than the highest income tax brackets, leading to a problematic situation. “A significant portion of these individuals’ income is taxed at much lower rates than people who have less income but it is derived from work or profession,” the memo states. “For example, according to Israel Tax Authority figures, the average effective tax rate for the top 1% is about 26%, and the average effective tax rate for the top quartile is only 21%.” The proposed increase in the additional tax is intended to go some way toward correcting this situation, and increasing the amount of tax that the wealthy actually pay.

The increase in the additional tax is part of a broad policy of the Ministry of Finance targeting the highest income deciles, which includes canceling the scheduled increase in the amount of tax-exempt retirement income, and freezing the income tax brackets, despite the high inflation rate. This is equivalent to an increase in income tax in real terms. Thus, the Ministry of Finance seeks to impose most of the austerity measures on high-income earners, but at the same time it may lead to reducing the incentives to work, save and invest that will be required for the recovery of the Israeli economy when the war ends. .

Profits on home sales

Today, the additional tax is only partially paid on gains made from the sale of homes. Homes that do not fall within the Ministry of Finance’s definition of a “luxury home” (i.e., their value does not exceed NIS 5,382,285 in 2024) are exempt.

The Ministry of Finance says this creates a tax benefit for those investing in homes versus investing in other channels, “which is contrary to government policy.” Therefore, the Ministry proposes to abolish the luxury home category, and subject the sale of any home to the additional tax, except for the first home.

According to the Ministry of Finance’s expectations, raising the additional tax rate from 3% to 5% will generate one billion shekels for the state in 2025, and 1.5 billion shekels every year after that.

In addition, expanding the scope of application of the surtax on real estate investments will add revenues of NIS 420 million in 2025 and another NIS 510 million when the measure fully matures in 2029. In other words, in the long term, changes to the surtax are expected to Adding just over 2 billion shekels to state revenues annually.

Published by Globes, Israel Business News – en.globes.co.il – on October 9, 2024.

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