Families in the top 0.01% in Israel in terms of wealth will pay on average an extra NIS 300,000 in surtax in 2025, according to calculations based on the Ministry of Finance's forecasts for a new law, which came into effect on January 1 and seeks to enlarge tax collection from the wealthy.
While the Ministry of Finance is reaching into the pockets of the general population, in efforts to narrow the budget deficit caused by the war, by freezing income tax brackets and credit points, raising National Insurance contributions, and collecting one recreation day from every employee's paycheck, these measures are not progressive and have almost no effect on the wealthy.
About 2,500 households, which constitute the top 0.01% of Israel's population, each earn over NIS 20 million a year with about 90% of their income is from passive income. In other words, not from wages for work but from dividends, profits real estate appreciation, investments in securities, income from rents, and the like. Therefore, the new surtax rate aimed at the wealthy focuses on income from capital and not from wages.
Surtax was introduced in the wake of the 2011 cost-of-living protests, with an individual’s annual income above NIS 721,560 being taxed at a rate of 3%. The new amendment imposes an additional tax of 2%, but according to a slightly different model, in which only passive income above 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.
PwC Israel tax partner and head of tax group Eric Benishay illustrates the new tax with the following simulation: "For example, an individual who has an annual income of NIS 600,000 from a salary, and another NIS 200,000 from dividends for a total of NIS 800,000 will only be subject to the 'old' surtax of 3%. This is because they have exceeded the annual ceiling of the old surtax, but not the annual ceiling of the surtax, with only NIS 200,000 of passive income, out of a minimum threshold of NIS 721,560."
Above and beyond the Ministry of Finance's urgent need to narrow the deficit, the rationale behind the change in the surtax legislation lies in the significant gaps in the distribution of income in the Israeli economy. Data presented to the Knesset Finance Committee reveals an interesting picture: out of capital income of about NIS 120 billion in 2021, NIS 86 billion, more than 70%, was earned by the top 1%.
The Ministry of Finance's numbers speak for themselves. The new surtax will apply to some 27,000 households, with 99% of the tax being paid by the top 0.1% of Israelis, about 20,000 households. Furthermore, 75% of the tax will be paid by the top 0.01% alone - approximately 2,500 households.
The data presented in the Knesset by the Ministry of Finance reveal a significant gap: while the effective tax for the top 0.01% is 26%, and for the rest of the population at 23%, 90% of the income of the top 0.01% comes from capital.
This means that a significant portion of the income of the top 0.01% is taxed at lower rates compared with those with lower incomes from work.
According to Ministry of Finance forecasts, the change in surtax is expected to yield a significant addition to state revenues: about NIS 1 billion in 2025, and about NIS 1.5 billion each year thereafter.
Another part of the law, which was split off by the Finance Committee, concerns the taxation of apartments for investment, and is supposed to add about NIS 420 million more annually to the state coffers.
Published by Globes, Israel business news - en.globes.co.il - on January 1, 2025
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