Tech employees pay over a third of all income tax in Israel, study shows
Report emphasizes the urgency of investment in startups and education for underrepresented populations to secure one of the main sources of tax revenue
Sharon Wrobel is a tech reporter for The Times of Israel.
Israel’s tech employees pay more than a third of all tax income collected, according to a new study that underpins the vital importance of the sector as a key driver for the growth of the war-battered economy.
The findings of the joint report by the Israel Innovation Authority, which is in charge of directing the nation’s tech policies, and the Finance Ministry’s chief economist division lay out the country’s dependence on tax revenues from the tech sector, as security and civil costs rise during the ongoing war with the Hamas terror group in Gaza while revenues from other sectors such as real estate, retail, and tourism drop.
Tech employees were responsible for about 36 percent of income tax payments in 2021, according to the study. In addition, about 24% of all tax revenue was collected from employees and companies in the tech sector. Total state revenues directly derived from tech activity in Israel amounted to about 9.2% of the state budget in 2020.
“Today’s data highlights the fact that Israel’s natural resource is human capital – responsible for most of the state’s revenue from high-tech,” said Israel Innovation Authority CEO Dror Bin. “High-tech serves as the ‘growth engine’ of the economy and acts as a ‘shock absorber’ during crises.”
“The insights from this analysis reinforce the importance of government action to protect the sector and ensure its continued growth, even during economic slowdowns,” Bin urged.
The Israeli tech industry last year contributed 20%, or NIS 340 billion (NIS 91 billion) to local GDP, versus 6.2% in 1995, and made up 53% of total exports. The economy’s dependence on state revenues from the tech sector has significantly grown in the past decade driven by a rapid growth in the number of the sector’s employees and rising salaries. Between 2016 and 2021, income tax collection from tech employees increased by about 66% in real terms from NIS 12.6 billion to NIS 21.8 billion.
Over a six-year period from 2016 to 2021, tech employees paid about NIS 100 billion in income tax, accounting for about a third of all income tax payments during the period.
The findings of the report amplify the importance of Israel’s tech sector representing one of the main sources of state revenue, especially during the current war period when the budget deficit is expected to widen and amid expectations for a decline in revenues from sectors that are more susceptible to security-related upheavals such as real estate, retail, and tourism.
Israel’s tech tech industry is at a crossroads, where its standing as both a global tech hub and as a growth engine of the country’s economy is threatened. Israeli startups have been grappling with dwindling financial runways amid a fundraising drought following political unrest during the first nine months of 2023 and the outbreak of war with the Hamas terror group on October 7. During the ongoing fighting, the Israeli army mobilized hundreds of thousands of reserve soldiers, some of whom remain in uniform.
The ongoing callup and continued uncertainty about the duration and extent of the Gaza war presents challenges in particular for early-stage startups, both in terms of attaining critical funding for their survival and in terms of their daily operations. As a result, many companies have started to lay off employees after a firing freeze followed the October 7 massacre, while general demand for employees in the industry is not high.
During this challenging period, Bin urged the government to increase the Israel Innovation Authority’s budget, as private investors scale back their investments, to “help us maintain Israel’s technological edge, cultivate the next generation of high-tech companies, and ensure that we continue to lead in global technological innovation.”
As part of the 2024 budget, the government bolstered the Israel Innovation Authority’s base budget by an additional NIS 1 billion to help fund a stimulus package for local startups that have been struggling to get funding in the face of geopolitical uncertainty and growing security tensions.
The Israel Innovation Authority is now calling for a multi-year plan for investment in research infrastructures and startups in view of the war toll on the economy, and expectations for tighter government spending.
“Given the high-tech sector’s contribution to state revenues and the Israeli economy, it is essential to significantly invest in research and development infrastructure and startups, which are the future growth engines of the sector,” Bin said.
The Israel Innovation Authority believes that “the creation of a state commitment to the success of Israeli high-tech may send a positive signal to the market.”
A breakdown of tax revenue receipts from the tech industry showed that 85% stems from taxing the wages of the sector’s employees because of their high salaries, and only 15% from corporate tax. Startups generally take a couple of years to generate profits, while most of the profitable tech companies, including multinational tech corporates, benefit from reduced levels of taxation as part of the Encouragement of Capital Investments Law.
“It is important for the state to ensure that high-tech employment continues to grow and that the number of employees in the high-tech sector at least maintains its relative share of the total number of employees in Israel,” the Israel Innovation Authority said.
The average tech salary in 2022 was NIS 27,900 ($7,500) per job – 2.7 times higher than the economy’s average for that year. As a result, tech employees are responsible for higher tax payments than employees in other sectors of the economy. Tech workers in 2021 paid an average monthly income tax of NIS 6,966, about 6.3 times higher than the average in the rest of the economy of NIS 1,112.
A geographic and population analysis of salaried employees in the tech sector found that 57% of taxes in 2021 were paid by non ultra-Orthodox Jewish men, working in central Israel and Tel Aviv. At the same time, there are still marked differences in tax payments by employees from underrepresented groups in tech, including women and employees from the Arab and the ultra-Orthodox Jewish population groups, mainly due to salary disparities.
“Therefore, it is crucial to continue investing significantly in quality education for all population groups in Israel,” Bin said. “It will expand the circle of high-tech employees, thereby boosting state revenues and strengthening the Israeli economy as a whole.”
In order to reduce the disparities and to improve, the Israel Innovation Authority recommended that the government continue to strive to expand the sector’s potential employment base, by facilitating and encouraging the participation of underrepresented populations in the tech sector.
