Israel may need to abolish its 200-shekel banknote and eventually eliminate cash altogether to combat tax evasion and avoid steep tax increases, Tax Authority Director Shay Aharonovich said Monday, warning that soaring defense spending could force the next government to impose painful measures as early as 2027.
Speaking at the annual Tax Advisers Association conference in Eilat, Aharonovich revived the controversial proposal to withdraw the country's highest-denomination banknote, despite opposition from the Bank of Israel. He estimated that eliminating cash transactions could generate an additional 20 billion to 30 billion shekels in annual tax revenue by reducing undeclared economic activity.
"We will have to eliminate some cash payments, which have already been restricted recently," Aharonovich said. "The Bank of Israel opposes abolishing the 200-shekel note, but we have seen in police investigations what is happening with cash payments, including very recently in local authorities. We will have to demand and implement tough measures, from abolishing the 200-shekel note to eliminating all cash in the future."
He argued that such a move could provide substantial revenue without imposing additional taxes on the broader public. "If we abolished the use of cash in Israel tomorrow, it could bring in another 20 billion to 30 billion shekels in taxes annually and prevent other painful measures," he said. "But the Bank of Israel opposes it."
Aharonovich's remarks came as political figures attending the conference, including Minister Eli Cohen, former Prime Minister Naftali Bennett, Avigdor Lieberman and former senior Finance Ministry official Shaul Meridor, pledged to prevent tax increases after the October 27 election if they joined the next government. The tax chief offered a sharply different assessment, saying a series of increases would likely be unavoidable.
He disclosed that a special Finance Ministry team, including senior Tax Authority officials, the head of the Budget Department and the ministry's chief economist, was already preparing tax proposals for the incoming government.
"The budgets for 2027 and 2028 will be brutal," Aharonovich warned. "Unfortunately, we do not expect exceptional economic growth next year. We are continuing to fight on seven fronts. The U.S. president says he will go to another war with Iran, and the defense budget could reach around 200 billion shekels, not only in 2027 but also in 2028."
He also criticized what he described as unchecked military reservist mobilization and a lack of meaningful scrutiny of defense spending. "There is a complete lack of restraint when it comes to calling up reservists, and nobody challenges the defense establishment," he said. "It is already clear that an annual defense budget of 200 billion shekels will force the next government to raise taxes."
Tax Authority Director Shay Aharonovich
(Photo: Foto Marcelo)
Among the alternatives under consideration is tightening legislation on undistributed corporate profits, commonly known as trapped profits. Aharonovich said the government should prioritize targeted measures to finance mounting defense costs rather than immediately increasing value-added tax and personal income tax rates.
"We are trying to think creatively and find solutions that will not burden the entire public," he said. He warned that raising VAT by one percentage point, increasing income tax rates and reversing efforts to widen income tax brackets would be easier but less desirable options.
Aharonovich also criticized the decision years ago to abolish Israel's property tax on land, describing it as a mistake driven by special interests. "A group of interested parties abolished a good tax," he said. "If we don't come up with good, creative solutions, we will find ourselves with no options, and then we will have to raise VAT and income tax, which would be a bad solution."
Tax Advisers Association President Yaron Gindi agreed that some tax increases would be necessary but argued that the burden should fall more heavily on capital and property rather than wages. He proposed taxing rental income from the first shekel earned, eliminating the current exemption for monthly rental income of up to 5,654 shekels.
Gindi also supported requiring all citizens to file annual income tax returns and imposing taxes on companies such as Netflix, which he said currently benefit from exemptions. He criticized Finance Minister Bezalel Smotrich's proposal to raise the tax-free threshold for personal imports above $75, arguing that it would benefit the Chinese economy at the expense of domestic businesses.
The Bank of Israel, however, firmly rejected the suggestion that the 200-shekel note could be withdrawn, stressing that the authority to cancel banknotes rests exclusively with the central bank governor.
"No professional justification has been presented to the governor for canceling any particular banknote," the central bank said in a statement. "No country in the world has abolished cash altogether. Therefore, the governor has no intention of exercising his authority to cancel any banknote or change the composition of banknotes in circulation."
The response leaves the Tax Authority's proposal facing a significant institutional obstacle, even as officials prepare for what Aharonovich described as two exceptionally difficult budget years. With defense spending potentially reaching 200 billion shekels annually, the next government will have to decide whether to pursue unconventional revenue measures or impose broader tax increases on households and businesses.