Israel’s Taxation Policy

After a long period of stability in tax rates, in 2004 a process of marked reductions in corporate and individual income tax rates began, leading to competitive levels in the global arena, thus attracting companies to Israel while making the departure of individuals and companies abroad less attractive. The chapter starts by presenting a review which shows that changes introduced in Israel’s tax rates were consistent with government’s multi-period budget constraint, except for a few periods. Between 1960 and 2002, tax rates changed in response to changes in government spending; whereas in the sub-period 2003-2015, the government deviated from this pattern: taxes dictated government spending rather than the reverse. The second section of the chapter examines whether there is a connection between politics and decisions regarding changes in the statutory tax rates. It is found that a government led by a member of a centrist party lowered both income and corporate tax rates, and that in a coalition controlled by a right-wing party prime minister, there was a tendency to reduce the corporate tax rate. It was found to be the case consistently, with evidence from other countries, that governments controlled by a left-wing prime minister increased the ratio of progressive to regressive taxes.