Israel is facing very large fiscal needs as a result of the COVID-19 crisis and the need to upgrade vital public services after a long period of neglect, and therefore tax increases will be inevitable in the near future. At the same time the many flaws of the Israeli tax system call for urgent reform, and thus this is a unique opportunity to initiate a comprehensive move to meet these combined needs, while promoting two main goals: striving for tax fairness and tackling negative externalities.
To address them we lay out a wide range of recommendations, the key ones being: Taxing all types of capital income (dividends, capital gains, interest and rent) at a uniform rate of 31%; terminating the tax exemption on advanced-study funds; unifying the corporate tax and lowering its rate to 22% while eliminating all discounts; taxing inequality within large firms, by raising the corporate tax to the most unequal firms to 23%, while lowering it to the least unequal to 21%; in terms of tackling externalities, we propose instituting a carbon tax on all fossil fuels, a sugar tax on soda drinks, and a congestion tax on vehicles. These changes will not only simplify the tax system and make it more fair and equitable, but at the same time they would increase total tax revenues by about NIS 16.5 billion (1.2% of GDP), thus serving urgent fiscal needs. Although the political impasse makes it difficult to carry out significant reforms, the COVID19 crisis may prove to be a potent catalyst to that effect.
