Tax Authority Chief Warns of 2027-2028 Fiscal Strain, Urges Structural Reforms
Tax Authority Director Shay Aharonovich warned at a Tel Aviv conference that 2027-2028 will face deep fiscal challenges due to defense spending, calling for structural tax reforms rather than VAT hikes.
Speaking at the Investment Houses Association conference in Tel Aviv, Tax Authority Director Shay Aharonovich warned that the years 2027-2028 will present severe fiscal challenges due to soaring defense budgets following the October 7 onslaught. While tax collection recently exceeded expectations due to harsh austerity measures, Aharonovich emphasized that such resilience is not infinite.
Structural Reforms Over VAT Hikes
Aharonovich revealed that the Tax Authority is drafting a comprehensive taxation plan for the incoming government. When asked about a potential Value Added Tax (VAT) increase, he dismissed it as a simplistic, stopgap measure. "Raising VAT is looking under the lamppost and a sort of 'Aspirin'," he noted. Instead, the administration intends to pursue structural reforms rather than repeating a flat-rate hike.
Financial teams are heavily focused on the marginal tax burden borne by working citizens. Aharonovich pointed out that employees hit the 50% marginal tax bracket far too quickly when factoring in health tax and national insurance contributions.
We reach 50% too fast when adding health tax and national insurance. On the other hand, we see many tax credit points, for example regarding children, and this does not always reach those we think it should. We have massive exemption mechanisms and we are thinking about how to lift the burden from the working person, and since the money must be raised - we will bring it from elsewhere.
Real Estate Market Warnings
Addressing the real estate sector, Aharonovich discussed the taxation of trapped profits and wallet companies, confirming that the reform brings in nearly 10 billion shekels annually and will be evaluated ahead of the next budget.
Furthermore, the temporary order raising purchase tax to 8-10% is set to expire by the end of the year, dropping back to roughly 5%. The incoming government will need to decide whether to extend the order, a move that requires three Knesset readings. Colleagues at the Ministry of Finance and the Ministry of Construction oppose the extension due to cooling prices.
Concluding his remarks, Aharonovich issued a warning regarding housing supply: "I can say that we must be careful with the real estate market. The Israel Land Authority (ILA) is having a weak marketing year and there are fewer executions of urban renewal building permits, and I fear that in two years supply will be lower."
